If performance is cyclical like everything else in nature than asset prices are always relatively outperforming and underperforming. An underperforming asset is sleeping and stagnating. It lacks trading interest, tests patience and will deliver less than expectations. Now one may say, it is impossible to find when the Nifty sleeps and wakes up? Before we prove that one can pinpoint time let's look at the shifting seasonality from sleeping and waking performance. Once we establish this seasonality, a momentum trader or investor would know that Nifty is going to sleep. Then you can do better with investments by simply ignoring Nifty.

Ignoring, avoiding Nifty might seem like a shocking idea, but examples are all around us. Nifty underperformed an average of 28 of the Nifty 50 on different holding periods (5 days, 1 month, 3 months, 6 months, 1 year). This means you could have really done better with the cash (investment) by choosing out of Nifty or being with an asset that was awake. Fig 3 shows the average return of Nifty 50 over various periods and how Nifty returned above (blue) and below average (maroon) periodically.

Sleeping and waking up seems magical because it is connected with time. If you can forecast when something sleeps and when it wakes you are actually talking about trading on time, trading with a clock that beeps once for an asset that goes to sleep and twice for an asset that wakes up. You are pushed into activity when the asset is awake and you can push the asset out of coverage when the timer beeps once.

Fig 2 illustrates the relative return ranking of Nifty among Nifty 50 assets over various holding periods. The relative rankings (performance) vary with holding periods. Nifty is a weighted average hence the shifting performance.

There is another thing which is tough to visualize. For an investor the Nifty could be sleeping while for the trader it could be awake. As a futures trader you could consider a Nifty 100 point move as a good profit while on the other side an investor could be looking for a 1000 point plus move on the Nifty.

A move of 10% could be considered sleeping or awake depending on the holding period of the market participant. The idea that we are trying to convey here is spectrum, shades of performance connected in time. Simply putting different market participants with different risk profile and holding periods have timer’s beeping at all times. For some it is telling exit (sleep) and for some enter (wake up). It all looks like chaos, but with a clearly defined internal order.

Fig 1 and Fig 4 show the shifting seasonality of Nifty compared to the returns of its own components. One may express disbelief regarding Nifty sleeping and waking at the same time (underperformance and outperformance) and that there are shades of performance. The respective figures illustrate how Nifty quarterly relative performance was positive while half yearly performance was negative. The performance was oscillating. Now if one still insists that performance cannot be positive and negative at the same time (based on different holding periods), it is behavioral bias at work not rationality.

In Fig 2 we have enclosed the alpha rankings for Nifty for an intermediate period (multi week). As one can see Nifty at 24 is placed in the centre now. These rankings are against Indian Rupee. The higher the ranking moves the more awake (performant) the Nifty is. The lower the ranking goes, the sleepier the Nifty is. Rankings oscillate from a sleeping mode to an alert mode cyclically. Now that our anticipated resistances have held, we continue to look at a sleepy Nifty ahead for the next few weeks. Investors would be advised to look out of Nifty into other sectoral performers (Oil) and traders who want to assume risk can even short the sleeper.

Mukul Pal. CMT, Orpheus Capitals, Global Alternative Research