»Profit Hunter by Equitymaster

On This Day - 30 AUGUST 2019
Worst is Over for the Auto Sector...Which Stock Will You Buy Now?

Apurva Sheth, Editor,Profit Hunter Pro

Would you drive a Ferrari on an Expressway looking in the rear-view mirror?

No way.

Then why invest based on past price action?

That is how a non-believer would argue with someone who considers price action before taking his investing decision.

He's right. Investing should be done based on what lies ahead.

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But what if I tell you that the past could give you a fair indication of what the future could be?

Would you still ignore it?

I don't think so.

It would sound unbelievable but I believe the worst is over in Auto sector. One should prepare for better days in the Auto space.

Don't believe me?

Read on...till the end.

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Indian stock markets are going through a rough patch for more than a year. There is bad loan stress in the financial system. The corporate capital expenditure is stagnant. The earnings are falling consecutively for many quarters. The consumer demand is shattered. Investor sentiment is at its low.

It is becoming difficult for a sector like Auto to grow in this environment. There have been layoffs in auto companies. Many of them have even appealed to the Finance Minister for a relief package. The FM has already made some announcements last week to improve their situation. There are some more measures in the pipeline.

Stock prices of Auto companies are worse affected. They are off significantly from their January 2018 highs.

% Drop From 2008 Highs


Some of these stocks are back to their demonetisation lows. Their valuations are at 5-year lows.

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How can one talk of the worst being over in such a scenario?

The answer lies in price action. But I am not talking about the recent past which still looks gloomy.

I am talking of the price action of the last 15 years. Market goes through cycle of greed and fear every few years. The Auto sector isn't any different.

The cycle of greed and fear exists for centuries. People were as greedy and fearful a hundred years back as they are now.

They tend to react in a similar fashion to greed and fear, which results in repetitive cycles. The reason for tops and bottoms may be different every time. But one commonality is that people were excessively greedy at the tops and excessively fearful at the bottoms.

History may not repeat but it rhymes.

I have spotted a rhythmic cycle of greed and fear in the BSE Auto index that repeats every 32 months. I will explain this with the chart below.

Greed and Fear Cycle in BSE Auto Index

 

This is a monthly chart of the BSE Auto Index since inception. I picked the major top of April 2006 as the end of greed phase in the sector.

The sector trended downwards for 32 months until December 2008. I have drawn the next vertical line there. This line marks the end of fear phase and beginning of greed phase.

I have followed the same approach and drawn each vertical line at an interval of 32 months.

I have marked the greed phase in green and fear phase in red.

You will notice that the index rallies 137% in the first greed phase which ends in 2006. It drops by 56% in the fear phase of 2008.

The index reverses its trend and moves up by 243% in the greed phase of 2011. The index ends the fear phase of 2014 with gains of 59%. It seems unusual but we can consider it as an exception.

The index moves up by 51% in the greed phase of 2014. It ended this greed phase in December 2016 and since then it's in the fear phase. The index has already lost 21% in this fear phase.

But the good news is that the fear phase ends in August 2019. Next month onwards the index enters the greed phase and will stay there until December 2021.

This means that the worse of the fall could already be behind us. There's enough time left for a turnaround even if the index dragged lower for a couple of months.

So one could keep an eye on the Auto sector and stocks within the sector. It's getting ready for an upmove once again and you don't want to be caught off guard. Do you?

I have already picked an auto stock for my Profit Hunter Pro readers this week. My target for this stock is a gain of 8.47%. It's up more than 5% and I've already revised our stoploss up above our cost price. So, chances of losing money on this stock are minimal.

I will guide all my readers through this turnaround phase.

I'll pick fundamentally strong stocks for you at the right time.

Now if you want to benefit from this up move in the auto sector, join Profit Hunter Pro today.

Warm regards,

Apurva Sheth
Apurva Sheth
Editor and Research Analyst, Profit Hunter Pro

PS: Dear reader, identifying profitable turnaround trades requires a proven trading strategy. This is exactly what I've developed for you. Read all about my trading strategy here...

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