Relative performance can be used to judge market bias. A classic example is the gold-silver ratio line. When the ratio line is trended down, it’s time for prosperity and if it moves up, it’s time for market recessions or crisis. This is the reason gold-silver ratio is also referred as a sentiment indicator because it talks about market bias.

Jiseki performance cycle is another way to look at relative performance. There is another novel thing they do. They let you look at relative performance at all degrees of time smaller or larger. To illustrate our idea further, we took the two top ranking banking stocks from India over the 3 month and 6 month period viz. Kotak Mahindra Bank (KTKM) and Punjab National Bank (PNB). Since our idea of performance cyclicality works across time frames. For us a top 3m-6m stock should underperform its peers or other stocks in the group under study.

So now that we were confident about the respective stocks underperforming, we moved to gauging the market bias. We compared the stocks against their sector index, NSEBANK. The relative performance lead to a multi month (from Q3 2010) outperformance of NSEBANK in both cases till now as illustrated by the brown lines in the relative performance illustrations (Fig. 1, Fig. 2). This meant that the sector Index actually delivered more compared to these two top ranking banking majors. The relative performance structure since Q3 2010 also looks corrective suggesting that this consistent outperformance of NSEBANK vs. KTKM and PNB should reverse. We found a similar confirmation in relative Jiseki (Fig 3, 4) where both KTKM and PNB were underperforming NSEBANK and were potentially ready to outperform the sector index.

Now if the best sell (underperforming) opportunities are ready to outperform a sector index, this can only happen in one way. When markets fall NSEBANK falls more than KTKM and PNB. A fall on NSEBANK can't be a strong case for the overall market. This is how relative performance can be used to gauge market bias. One can extend the idea now to NSEBANK vs. Nifty to see which one is stronger and a better sell.

In conclusion a weak NSEBANK cannot be good for the overall market and with Nifty at key multi month trendline supports at 5,400-5,450 levels we have all the settings ready for a crack. Inability to push up above 5,550 could be our first signal. Markets are also entering seasonally negative period. The preferred negative view remains firm.

Mukul Pal, CMT, Orpheus Capitals, Global Alternative Research