Market crash destroys two-year imbalance among Index stocks

How a two-year-long inhomogeneity among market segments was blown away in five weeks when stocks crashed!

Published on / By M. Pattabiraman Twitter: @pattufreefincal / 1 Comment

Published: March 30, 2020 at 10:14 am

Last Updated on December 29, 2021

From Feb 2018 to Feb 2020 the stock market looked like it was moving in two different directions at the same time! Large cap indices like Nifty and Sensex moving up and other segments like Nifty Next 50, Midcaps and Smallcap moving down. This is how the ongoing Feb-Mar 2020 crash has “rest” this imbalance/inhomogeneity in quick time!

Readers may recall that we quantified this imbalance in Dec 2019: Return difference of Nifty 50 vs Nifty 50 Equal-weight index at an all-time high! On Mar 12th 2020, we noted that Why this market crash could be healthy after all, as the “reset” had promptly begun.

The two graphs below dated 11th March shows how the Nifty 50 fell more and fell quicker than other indices. As on Mar 11th 2020, Nifty 50 fell -14% from 1st Jan 2020. Nifty Midcap 150 8% and Nifty Smallcap only 9.33%.

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Normalized movement of Nifty 50 and Nifty 50 Equal Weight from Jan 1st 2020 to March 11 2020

Normalized movement of Nifty 50, Nifty Midcap 150 and NIfty Smallcap 250 from Jan 1st 2020 to March 11 2020

The two-year rolling returns of Nifty 50 and Nifty 50 Equal Weight is shown below. Notice how the Nifty 50 EW fell below Nifty in the boxed area.

Two-year rolling returns of Nifty 50 and Nifty Next 50 TRI Indices
Two-year rolling returns of Nifty 50 and Nifty Next 50 TRI Indices

The return difference between the two indices is shown below.

Two year rolling return difference between Nifty 50 Equal Weight and Nifty 50
Two year rolling return difference between Nifty 50 Equal Weight and Nifty 50

The down-arrows coincide with the 2008 and 2020 market crashes. The up-arrows coincide with bull runs.  This is only approximate and should not be taken too seriously.  The above “metric” is a vague indication of market valuation: lower the 2Y NIfty 50 EW return minus 2Y Nifty 50 return, higher the Nifty 50 value.

This is obvious when spelt out like that and all it means is when only a few stocks are responsible for moving NIfty “up” the scenario should reverse sooner or later (not mean reversion). In the present case, this imbalance is two years old.

As on Jan 27th NIfty 50 Equal-Weight 2Y return is still 8% lower than 2Y Nifty 50 return! At the time of writing (30th Jan 2020, 10:12 am), the market is down about 2%. Perhaps we may not wait for too long for the rest of the difference to go away!

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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