Every quarter we put out a Quarterly Playbook for our Premium Members, with our three-part Q1 2020 note being published just now.
In this note, we want to outline one of the most informative charts from each of the three parts.
Part 1 of our playbook covers our macro view, touching on Equities, Commodities, Currencies, and Rates from around the globe. Here’s one of the most important charts out there right now. From a structural perspective, Small-Cap underperformance has indicated weak risk appetite among market participants and held the broader market back since early 2018. With that being said, the Nifty 100 vs Nifty Small-Cap ratio is back at its 2013 highs as momentum diverges. If a long-term reversal in this trend was going to occur, this would be a very logical level for it to start.
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The other reason we think this ratio could turn around here is because of the global stock market environment we’re currently in. In early 2018 when this ratio made a low and began to rally, we were in an environment where stocks around the world stopped going up and market participants positioned themselves defensively.
Today, we’re seeing the exact opposite. After 2 years of consolidation, market participants are beginning to take risk again as more and more stock markets around the globe break out to new multi-year/all-time highs. If this trend continues, then we’d expect Indian market participants to also put money to work in the “riskier” Small and Mid-Cap segments of the market, particularly if the Nifty 500 breaks out to new all-time highs and begins trending again.
Part 2 of our playbook delved deeper into Indian Equities, going sector by sector to identify the trends that matter.
The Nifty Commodities Index has been a big mess on a relative basis since 2016, but the ratio is now turning its way higher after finding support at its 2015/2019 lows as momentum diverges. As with the Large-Caps vs Small-Caps ratio, if this trend is going to reverse then this would be a very logical level for it to happen from.
Part 3 of our playbook outlined the individual stocks we want to be buying and selling within the context of today’s environment.
NLC India Ltd. is one of a number of Mid and Small-Cap stocks that are finding buyers at long-term support, often as momentum diverges positively. From a reward/risk perspective, as long as prices are above 52.50 in NLC India, it’s worth a shot on the long side for a move back towards 80.
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Thanks for reading and let us know if you have any questions!