An Insight into how we capture 45% up moves in just 6 months!
Ever since I started managing funds at Plus Delta Portfolios a common question I always get asked is how to blend technical analysis and fundamentals together. Our CGT model (Combined Growth and Trend) is the bedrock of my investment process and it’s through the tenets of this model that we have found a way to perfectly balance the feed of stock-specific fundamental information of DCB bank with our strong technical know-how.
There is no easy simple 2 or 3 step process to do this, although my background of being an investment banker and fundamental analyst at a top brokerage firm helps its actually the 4 decades of deep technical expertise and market reading ability that we have imbibed from our Founder & CIO Dr. CK Narayan that has helped us get this right.
Entering Long in DCB Bank!
We have always liked DCB as it’s a fundamentally sound bank which the market also took cognizance off ever since the management changes. The stock had a sustained multiyear uptrend, in spite of the carnage in 2018 – DCB suffered minimal price damage indicating strong trend strength. From a fundamental standpoint, we were convinced the only question was finding the right entry point using our proprietary CGT model.
We entered the stock at the beginning of the year when the stock seemed to be making a bottom from an intermediate correction. Around this time we had started getting bullish in the banking space; our readers will recall our podcast where we discussed how we felt the provisioning cycle was bottoming out. Around that period DCB bank posted strong numbers posting 51% YoY growth in net profits and 17.2% YoY NII growth. The stock witnessed good gush of momentum where it decisively broke above its exponential moving average bands on the monthly charts.
We then applied our Proprietary technical indicators that we have developed in house. It is a combination of various exotic oscillators that are specifically used and smoothened out to be applied on longer-term charts.
For Confirmation, we used our CGT trend confirmation oscillator – which flipped up and gave a buy confirming the strength of the trend post the decline. This was supported by a strong up move in the RSI. We used oscillators like MACD and DMI both of which gave us a positive cross over – indicating bullishness.
The well-orchestrated Exit
On the weekly charts of DCB, we noticed a gradual easing off of momentum at 245 levels which also signaled a halt to the rise witnessed so far. This was coupled with RSI divergence (marked with Red arrows) all through as the stock kept making new tops. “With the divergence, we were alerted to some possible topping action in the prices. When momentum was checked on daily charts (not shown), we found some clear evidence of sagging momentum and that warned us to be ready for some reversal price action. We received confirmation during the mid-July rally that failed to develop the necessary momentum that would have carried prices higher. We exited part of our positions there.
Before the results, the market had already given us an indication of bearishness towards DCB bank
The results were announced on 16th Jul 19, and DCB posted weak quarterly numbers for Q1FY19. While the bottom line increased by 16.63%, margins were impacted due to lower fee income and higher operational expenses. Core fee income declined by ~22% and operational expenses were higher by 5% on account of salary increments and higher provisions on pensions. Higher slippages resulted in a deterioration of asset quality across all other major segments, barring corporate. The lender also witnessed an uptick in its bad loan proportion, with GNPA rising to 1.96% (up 10bps y/y, 12bps q/q).
The CEO of DCB, Murali M Natarajan said “We are focusing on granular retail term deposits in order to further improve our deposit profile. Some margin pressure will be felt for two more quarters, beyond which, we expect stability due to the re-pricing profile of long-term refinance and renewal cycle of customer deposits”
We were completely prepared for the downside that would arise from this and ready at market open to exit!
We exited the balance positions, even though there was a gap down we were forewarned of incremental price damage and that gave us the confidence to completely exit. The market has treated the results with a long bearish engulfing candle on monthly charts and the stock tanked 17% the next day.
Our Clients profited from a 45% up move in the stock, what more important is we perfectly found the top using technical analysis that enabled us to get out at the right time and protect those profits.
In this article alone we have used 3-4 different strategies and chart setups to arrive at a view on one stock. It is indeed painstaking, careful and meticulous work perfected with years of experience and application that gives us an edge.
Fund Manager – Plus Delta Portfolios
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