(Photo by Lum3n/Pexels)
Covid-19 presented the world with new realities. One of them was the way stock markets can behave. The Indian markets went from climbing new peaks to dropping dramatically, though to a higher low than what it was before the pandemic.
The markets went from being strongly trending to a highly volatile, consolidating one over the last two years. Investors and traders have been on a rollercoaster ride; it can’t have been easy and it must have been illuminating.
We asked a few veteran investors and traders about the lessons they have taken from this unparalleled period.
Also watch| Julius Baer on the year ahead for markets| Will India continue to outperform?
Tune out the news, tune into the charts: In this highly volatile market, it is most important to “not listen to the news but to listen to the charts,” according to Ashish Kyal, CMT-USA and author of Effective Trading in Financial Markets using Technical Analysis. “The news maybe very pessimistic but that may be a very good opportunity to buy,” he added. As an example he cited news reports post March 2020, when they were focusing on the rise in Covid cases. But the charts were giving a different signal. “On March 24, Nifty found a low of 7,511. Then the fall was arrested and the index gave a higher high and higher low formation. Going by the simple Dow Theory, it was a sign that the (downward) trend was changing or pausing for now. Despite all the pessimism the index was continuing to ride on the upside, so it was ignoring the news from the pandemic,” said Kyal. In the year that followed, the index gave more than 100% return. “Even if an investor went by moving averages, of 20 days and 50 days, then the 20DMA crossed above 50DMA in May 2020 and it stayed above the latter the till March 2021. The index went from 9,300 towards 15,000-levels in this period,” he said.
Post October 2021, when Nifty topped out at 18,600, the sentiment was exactly the opposite but the charts were signaling a fall. “Everyone was super bullish and the news coming out was positive but the market was constantly moving down, making lower highs and lower lows,” said Kyal. At this point, though the 20DMA came below 50DMA, the former was whipsawing so “it isn’t a foolproof system, it can give an insight into the market direction”, he added.
In a volatile market, act like a trader: “When the market is volatile and giving good swings on either side, then you might want to act like a trader and not just an investor,” said Kyal. “You will be able to capitalize on the swings on either side. If you had been holding (onto your positions, like an investor) then you would have lost money but if you were a trader, you would have been able to make money because the swings were big enough with 1,000 to 2,000 points variations,” he added.
Have entry and exit strategies in place: “A trending bull market may see pullbacks but you continue to make higher highs and higher lows, which is what we saw from March 2020 till January 2022. From January 2022, we have been seeing an up-down market (falling a 1,000 points then regaining around that and then falling again by the same measure and so on), when it is much better to trade both ways,” said Rohit Srivastava, founder and market strategist at Indiacharts. According to him, the key is to identify if the market has switched from a trending market to an up-down market, and then entering and exiting the market. “Earlier you could have simply held on (to your positions) and building when it dips, but in an up-down market, you need to have entry and exit strategies in place,” he said. To exit, he uses a combination of Elliott Wave Analysis and a proprietary momentum indicator called the Rohit Momentum Indicator (RMI) which is being used in other platforms as well.
Understand how to trade sector-leadership: “Historically, in India, the markets peak out and then trend downwards for six to 12 months. But, in 2018-2020, for the first time, the indices didn’t fall as much as the stocks were falling. I hadn’t expected a repeat of that but 2022 has been a repeat of that with a lot more rotation,” said Srivastava. Different sectors performed well at different points in time in the last 8-12 months. That required investors to track sector-wise performance and move from sector to sector within few months, besides playing long and short side of the market, he said. Therefore, the more diversified the portfolio, the lesser the returns. “The (up-down market) required an understanding of how to trade sector-leadership and how to switch from one to the other,” said Srivastava. For this, an investor could track momentum (rate of change in a stock’s performance) and relative strength (by looking at performance of the stock relative to the index).
Also watch: KIE’s Sanjeev Prasad talking about the top themes for the new year
Forget all the once-successful strategies: The derivative strategies that worked between 2019 and 2021 will not work in 2022, according to Shreyas Bandi, a professional trader. Mostly because the volatility environment was completely different back then and in 2022. “Essentially you could discount the profitability by half and double drawdown expectations, compared to what was happening during the Covid saga,” he said. “You had a steady cool off in implied volatility (in those three years) but now we are in the lower range, so the strategies that worked then (heavily favouring the short-volatility side) will not work,” he said.
Also, a lot of investors are putting their money on similar trades and this is causing the returns on this to fall. “There are two primary systems (strategies)–one is a 920 straddle and the VRP Harvest—that were successful in 2020 and 2021. With people seeing these were successful then, there is a surplus of supply in these strategies. Since there are so many people trading the same strategy, it has brought down the returns on the two strategies,” he said.
Don’t have an anchoring bias: An investor/trader shouldn’t have a view and go searching for news that confirms it, according to Ashish Kyal. This is particularly when a market changes character, like it did. “You should be ready to change your stand and not fight the trend. When the market was on the upmove, there were many who were continuously selling. They would have lost an opportunity to make money and lost money in the shorting,” he said.
