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Charts & Analysis

Charts: Positive Momentum, Negative Momentum and the Carnage within


What goes up has to come down, said Isaac Newton, in reference to Gravity. Stock prices move in cycles with the upside celebrated as coming of age for the markets and the downside fretted upon as act of lunacy.

When we talk about markets, one generally refers to the broader indices that are seen as the bell-weather measure on how the market is performing. In years when the broader markets are higher, stocks generally are higher and vice-versa.

Going by that logic, 2018 was a whole different ball game altogether. Sensex and Nifty both ended the year in positive, Portfolios of most investors, not quite! Market internals broke like no other time though with majority of the stocks ending sharply lower.

We had covered some of this in our year end post, this post is more about 2 additional ways of looking at data. First off, the kind of movements compared to Market Capitalization.

Relative Market Capitalization

For this we will take the Market Cap of stocks at the beginning of 2017 and see how they fared in 2017 and later in 2018.

Charts: Positive Momentum, Negative Momentum and the Carnage within

2017 was a fantastic year and regardless of what market-cap you started at, almost 85% of companies saw their price close higher. 2018 saw role reversal for all companies where they had a market cap below 2.5 Lakh Crore.

The reason for the large cap index to show gains in 2018 came from this small minority of companies which command a very high weight in the index.

Positive Momentum vs. Negative Momentum

In bull markets, majority of the stocks are in buy zones or with positive momentum. In bear markets, we see the inverse with majority of stocks showing negative momentum. We define positive momentum as a stock whose price movement indicate a sharpe ratio of greater than 1, over a 1 year period. (Meaning, the increase in price of a stock is relatively higher than the volatility it has seen over a 1 year period)

We plot this as a percentage of the total stock universe.

Charts: Positive Momentum, Negative Momentum and the Carnage within

Charts: Positive Momentum, Negative Momentum and the Carnage within

The last time we had so few stocks that had positive momentum was in 2011. 2011 if you remember was a negative year with the Index closing the year with a loss of 24%. While Nifty of today still is not even down 10%, stocks on a whole are exhibiting a pattern that is similar to long term bottoms.

The last year few years of gains has resulted in build-up of complacency and leverage by retail investors. Unraveling of those can mean further downsides in the market – stocks with negative momentum can become even more negative.

The indicator here tells us that:

  • as a market we are very heavily negative on breadth – there are way more stocks with price damage than there are that are seeing appreciating prices
  • this has happened before, but about 7 years ago, and subsequent year returns have been quite good (at least visually). However we could easily go further down from here
  • The last time (2011) that we saw such negative momentum, the broad index was also down 25% from peak. This time, the Nifty is only down 10% from peak, but the broader indexes are hurt much more.
  • Still, it doesn’t mean that now is the best time to buy. It just means the risk-reward is in your favour, if you’re a longer term investor, and you’re building portfolios at this time.