After three dull days, there was hope that the market would break out of its range, and it did so in the morning. However, it collapsed back upon itself, resulting in another day of almost nothingness. I would say the market is completely in year-end celebratory mode, so not much is expected right now until the next move comes through.
Today’s topic is about ignoring strong warnings from index committees, how indexes get rebalanced, and what kind of stocks are exiting and entering the index. A lot can be deduced by looking at stock charts to see what has been the formation of those charts going out and what has been the formation of those charts going in. You can gain significant insights based on this. We will dive deeper into this in the second half of the video
Where is the market headed?
Market Overview
You can see very clearly that the Nifty tried to break out of the three-day range. The three-day top was broken, and it went up to 23,938 before collapsing back to very near yesterday’s close, at a 0.27% change. No harm was done, but there was no real gain either. The market is simply buying time right now, trying to get over with this current calendar year.
Nifty Next 50
However, the Nifty Next 50 almost closed at the lower end of the last four days’ sessions, which certainly doesn’t look good. It ended 0.88% down on Nifty Junior, and it seems that those three days of consolidation may now be followed by a downtrend. There is a gap here that is yet to be filled, so as soon as we break below this five-day low, there’s a likelihood of going to a lower range in the mid-cap space.
Nifty Mid and Small Cap
The mid-caps were again quite dull, ending with a 0.12% movement, marking the fifth close within the same time period and range. The mid-caps are still holding on, but haven’t yet given up on the range. Small caps are also holding on, with a slight 0.27% change, ending with another range-bound day.
Nifty Bank Overview
Bank Nifty, too, did not do much, remaining inside the range of the previous day, reflecting the absence of any momentum, whether up or down, with a 0.27% change. On CNX 500, there was an almost even distribution of advances and declines, with a ratio of 251 to 242.
Advanced Declined Ratio Trends
Nifty Heatmap
Looking at the Nifty heat map, you can see that there were sporadic gains in Mahindra and Mahindra, Dr. Reddy’s, but losses in SBI, Coal India, ONGC, BEL. The others remained reasonably stagnant. Nifty Next 50 was almost entirely in red. Siemens continued its fall, along with ABB, while Vedanta, Gas Authority, JSW Energy, REC, and PFC were all losing ground. Zydus Life, Dmart, Adani, and Sol were the only green spots in the Nifty Next 50 space.
Sectoral Overview
In terms of sectoral trends, Pharma and Autos, which have been performing well over the last few days, were the leaders for the day. Pharma is now up 5.4% for the month, which is the highest gain in any sector over the last month. Pharma has gradually been picking up, and over the last 12 months, Pharma is almost the top gainer in terms of sector. Autos are also starting to come back, up 1% on the day and 2.3% for the week, although down 1.8% for the month. Despite a bad quarter, Autos are still up 26.7% for the last 12 months, making them the third-highest gainer. On the other hand, Public Sector Enterprise stocks, Metal stocks, PSU Banks, and commodities are all down, which is not a great sign, as defensives are leading while high-beta stocks are going down. This could indicate that the market may crack down in the coming sessions.
Sectors of the Day
Nifty Pharma Index
Pharma stocks are doing particularly well, with Ajanta Pharma gaining 9% today. Other pharma stocks like Glenmark Pharma, Laurus Labs, Dr. Reddy, Zydus, and Abbott Labs also made substantial gains. The pharma index chart looks quite healthy, and we are likely to see new all-time highs soon in this sector.
Stock of the Day
Akmus Drugs And Pharma
One stock, Akmus Drugs and Pharma, which had fallen from ₹1,150 to almost ₹500, is now starting to rise, with a 10% gain for the day.
Story of the Day : The warning from index rebalancing
We’ll specifically look at the re-ranking of the NASDAQ 100, the most popular technology and biotech index in the U.S. Every year, the NASDAQ 100 goes through a rebalance. Unlike Indian indices, which undergo constituent changes every six months, most U.S.-based indices, including the NASDAQ 100, rebalance only once a year. This rebalance reflects the dynamic nature of the market, the changing nature of stocks in play, and the importance of adaptability to the current market situation.
In December of 2024, three stocks—Illumina, Super Microcomputer, and Moderna—were exited from the NASDAQ 100. Let’s take a closer look at these stocks and the pattern they show. Illumina is down 75% from its peak, Super Microcomputer is down 72%, and Moderna is down 92% from its peak. If you recall, Moderna was a huge stock post-COVID, soaring from $10 to over $400, and now it’s back to $40. This is a stark example of how the market can quickly change, and index rebalancing can be quite slow to reflect these changes. Momentum strategies would have probably exited these stocks much earlier.
On the other hand, three stocks are entering the index: Palantir, MicroStrategy, and Exxon. Just look at Palantir, which has gone from $6 to $82 in the last two years, marking a nearly 15x rise. MicroStrategy, which fell dramatically in 2001-2002, is now making a comeback, up 26 times since its low in 2023. Exxon, which had been on the rise, is up 17x since its breakout, and in the last year alone, it’s up about 4x.
So, what’s common with the stocks that are moving out? They’ve all been thrashed by the market. What’s common with the stocks moving in? They are doing very well. The market is essentially recognizing strong-performing stocks with momentum and rejecting beaten-down stocks that likely have a bleak future ahead. The problem with this index rebalance is that it’s often very late. If this rebalance had happened nine months ago, a lot of the pain from these exits could have been avoided. For example, Moderna was still at $100 nine months ago, and now it’s at $40. The same situation happened with Yes Bank when it was dropped from the index at ₹21, even though it had been dropping from ₹400. Investors holding index ETFs or index mutual funds would have been stuck with Yes Bank all the way down, while active strategies could have exited much earlier.
This highlights the difference between passive index investing and active strategies. While the index is inherently following a momentum strategy, it’s very slow, as it only rebalances once a year. Active strategies, on the other hand, can react much quicker and avoid the losses associated with stocks that are on the decline. The key takeaway is that the market is constantly evolving, and active involvement is needed to stay ahead.
Buy and hold, in my view, doesn’t fit today’s dynamic market. Stocks that have been doing very well can suddenly lose most of their gains within a few months, as we’ve seen with many examples. The rapid pace of market changes calls for more frequent rebalancing of portfolios, and the buy-and-hold era seems to be a thing of the past.
Additionally, due to technological changes and market disruptions, the average age of an index constituent has dramatically dropped in recent years. For instance, the S&P 500, which used to have a much longer average constituent age, now has an average age of just over 12 years, according to some recent studies. The importance and relevance of individual stocks change over time, and this is why indices need to constantly discard weak performers and add strong performers to stay relevant.
In India too, we’ve seen stocks like JP Associates, India Bulls Housing, Yes Bank, and IVRCL, which were once part of major indices, fade into obscurity. This highlights the constant change happening in the markets, and adapting to these changes is key.
So, the change is the only constant. Let us know what you think about the index rebalancing process and the importance of active strategies to stay aligned with market strength.
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