Momentum fund manager says market throwing more ‘sell’ than ‘buy’ signals

The Nifty ended lower for the sixth straight session on October 26.

Momentum fund manager and chief investment officer of Samco Mutual Fund Umeshkumar Mehta has said the firm’s automated systems that govern its buy and sell decisions have thrown up more sell signals than buy over the past few sessions.

After the October 26 selloff, Kumar said there were no big sectoral trends visible and sell signals were coming from across the board. The leaders of the last bull run, including defence, power and PSU bank stocks, were showing weakness.

“Sell signals are not exactly sector-specific rather they're coming from across the board, but leaders of the last rally are showing weakness,” Mehta said. This could be because of various factors – liquidity and profit-booking may be the key reasons, he said.

Reading the sign

Some stocks like Kajaria Ceramics, Pidilite, JK Cements were being thrown up by the system as “sells” over the past few days. Buys were few and far in between: two recent names that came to his attention as “buys” were Credit Access Gramin and Bajaj Auto, Mehta said.

Based on the signals, Mehta said he has raised cash levels in the fund to 15 percent. The equity exposure in his funds hovers around 85 percent.

A “sell” signal is an alert that further bearishness may be in store for the stock. A buy signal indicates that the stock is beginning to see more buying. These signals are triggered when the shorter-term averages cross longer-term averages, based on price and volume traded on the bourses. A cross-over to the higher side indicates a buy and vice-versa.

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Mehta said while a number of sell signals are getting triggered, a sell signal does not mean a steep fall in the stock price overnight. Mehta said their strategy was to watch the trends and sell only when a stock breaks statistically significant levels on the downside.

Understanding the momentum strategy 

Samco’s momentum model follows price movements of stocks looked at from two prisms: absolute performance and relative strength of the scrip with respect to other stocks in the universe, he said.

Here is how Mehta explained the momentum entry and exit strategy: Think of it like a person running at a certain speed like 30 km an hour. If the person gets tired and slows down to 25 km an hour, it is a sign of weakness and when he slows further below a certain threshold, we know he cannot recover and do better.

Similarly, each stock has a run rate or the velocity with which it moves. When that velocity goes down, and the stock falls behind its peers after a certain threshold, the fall becomes faster and it is time to sell the stock, he said.

Mehta said it is hard to predict how deep the correction could be. “No one knows. We just follow the price," he said. But there are several headwinds that will prevent people from committing money into the market. “There are worries around high yields, which will make people consider investing in bonds rather than equities. These headwinds won’t allow to move higher,” he said.

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On October 26, the Nifty closed 1.39 percent down, while the Sensex fell 1.41 percent. The strengthening of the dollar due to positive US economic data, causing the rupee to weaken, has been one of the main reasons for the market slide.

Second is the high 10-year US bond yields, at 5 percent, which reduce the appeal of emerging equity markets, potentially leading to foreign investment outflows in India.

Third, the expiry of the monthly F&O series on October 26, coupled with the Nifty falling below a crucial support, increased volatility and a bearish sentiment. Worries over crude persist as the Isreal-Hamas war worsens.

Unlike, the more popular “value” or “growth” strategy, which involves buying into fundamentally strong companies with a three to five-year view, the momentum strategy is to chase the market trend.

A medium- and long-term reference for momentum investors usually ranges from three to six months, at most a year.

“Momentum is not about looking at fundamentals and valuations, it is about capturing the trend base on price and volume movement in stocks,” Mehta said.

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