Many years ago I read a book entitled The Art of Low Risk Investing. It was almost the first book I read on Technical Analysis, way back in 1980 and it just blew me away. It was a simple book that entailed working with 3 moving averages (5,15,25) and creating a rule set around it. I was so impressed with it that I quickly began doing that. With that began my 4-decade long romance with active investing and trading that continues into today!
One of the passages from that book that I still remember (and often quote during some training seminars) is one relating to the fall in US Steel (which was one of the largest Co listed at the exchanges). Using the system proffered by the author, he said that one could have exited around $66 and it was not until around $18 that the directors of the company began to exit! And, worse, they were hauled up by the exchanges (or Sec perhaps) for insider trading! The giant steel company finally went bust a few years later!
The reason I am stating this is because something similar has happened with another hallowed stock of our markets- Tata Motors. There are many examples to quote but I am just choosing one where the activity is the most recent. While the horror quarter was just now, the downtrend in the stock has been going on for a long time. I just happen to read that many of the broking houses had downgraded their targets but almost none had downgraded their recommendation! Checking up further on this, I found that there were at least 42 reports in 2018 and all were “buys” for targets ranging from 325 to 475. This is just from one website. Perhaps there were more reports than the 42 I counted but that doesn’t matter. In fact, if you go back to 2017, you found another 45-50 more Buy reports! There wasn’t a SINGLE SELL REPORT! Like I said earlier, maybe there were some but this website had not listed it. I must also add that I did not find any particular bias for the long side in this website, so I am presuming that there were no sell reports.
Now, this is amazing! Tata Motors recorded its high near 600 in Sept 2016 (this was actually a retest of the former highs- but more on that some other time) and then went into a slide thereafter. So every single Buy report that came out thereafter was on the wrong track as far as the stock’s trend was concerned. Did anyone bother? Oh no! They were too busy finding ‘value’. Well, as it kept falling they continued to keep finding this elusive value and in 2018, I find that there were many that were recommending a buy even at the price level of 185! The reckoning, perhaps, was that the more it fell, the more ‘valuable’ it became! Even in Jan 2019, one of the reports has a buy at 176 with a target of 246. But now, after the Q3 disaster, there are a raft of ‘downgrades’- but of targets only and not the buy recommendation! I did see a couple of Hold reports too. Guess we have to give those reports some credit for at least acknowledging that the trend was walloping their view.
This is similar to the US Steel story that I quoted earlier. I am not alluding here that TaMo is going bust or some such but only that people who shall not pay attention to what the market is saying will end up paying a very high price for their ‘analysis’.
A technical study of the same Tata Motors, using just a simple 50dma gives an amazing read. See the chart. There were 3 signals issued by TaMo since 2015. First was a sell in May 15 at around 495 (stock fell to a low of 267 by Feb2016), then a buy signal in Apri 2016 around 400 (stock went to a high of 598 in Sep2016) and finally a sell in Mar 2017 around 475 (which is still in force with the price down to 150 currently). That’s it. One simple tool did the trick. What it required was belief that the trends matter. In fact, they are the ONLY thing that matter!
I can rest my case here but will just add a couple of points more. I am a complete subscriber to the idea that fundamentals drive price trends and that technical reflect the same to us thru charts. The flaw of an analyst is when he believes one analysis form more than the other. It didn’t matter to TaMo trends if the big bull of the market was eloquent about its cheapness or others thought it great. After 2016 it has been just one way down. So, the technical were clearly reflecting changing fundamentals that the report writing analysts refused to see or were simply unable to see. It was a case of US Steel-cant-go-down approach that used to prevail then (perhaps the first of the Too Big to Fail?) the prevented anyone from selling out early. Almost to a man, the market players were trying to find value in TaMo over the last few years. The market has refuted that search quite decisively. It is still doing so.
But who is listening?