Chai pe Charcha

Apurva Sheth
Last night I caught up with my BFF (best friends forever). There are six of us and know each other even before we knew anything about stock markets. Let alone stock markets, we know each other even before we were introduced to the concept of money. All of us studied in the same school, went to the same college and had similar interests.

I believe all of this helped our friendship last longer. We have seen each other in sad and happier times, during desperate and ecstatic situations and also when we were down in a hole and high up in the clouds.

Due to this close bonding that we share with each other, it is very difficult to hide anything from one another. Out of this circle of friends that I have, a friend amongst them is very much into the stock markets. He's a commerce grad, is a distributor of branded undergarments, hard-working, runs his business smartly and has started investing some of his profits in the markets recently.

Over the last one year that he has started investing, he has been consistent with one of the things. He has always called me up and asked my views whenever markets have fallen sharply in a day or two. (He also calls me up just to say a casual Hi as well ☺) However, this time it was different. Last week the markets had rallied by 3.7% and he called me up to ask my views on markets with a very concerned tone. Our conversation went something like this.

Him: Hey Apurva, Wassup?

Me: All well bro, how's you?

Him: Nothing great, business as usual.

Him: What's wrong with the markets?

Me: Why are you saying so? What happened?

Him: Markets have rallied so much in the last week, the media is screaming on top of their voice about new highs but my portfolio isn't moving anywhere?

Me: Hahaha!! I will tell you why this happened later in the evening when we meet but you will have to buy me a Chai for it. Let's call up other friends as well.

Him: Okay done, see you soon.

Me: Bye.

He was eagerly waiting for me to arrive at the dedicated time. As soon as he saw me entering the lane where his shop was located, he called up the Chaiwala and ordered 2 special tea and some snacks for us. I just entered his cabin and he bombarded me with his questions one after the other. By the end of it, he was more breathless than me.

I started sipping my cup of tea and began answering his question.

I told him that indeed markets had rallied quite a lot in the last few days and this is one of the best winning streak after the rally we had recently seen in May 2014.

However, one thing that you are missing amidst all the Brouhaha created in the media about Nifty/Sensex at new highs is the broader market participation. Just have a look at the Advance-Decline numbers and you will get the true picture.

He almost pulled the cup of tea from my hand and asked me to explain this in detail. I logged on to this page of nseindia.com on my mobile. I pointed him to check out the Overall Advance-Decline Box (marked in purple). This box represents the number of stocks that advanced or ended higher than its previous close. And the number of stocks that declined or ended lower than its previous close. The percentage of gains or losses is immaterial. What matters is only the absolute number of stocks that rallied or fell compared to the previous trading days close. He read these numbers loudly, "Advances: 519, Declines: 1,012, Unchanged: 67, Total: 1,598 as on 23rd January 2015". I pointed him to the Nifty's closing value which was mentioned in the rightmost corner at the top. It read Nifty - 8,835.6 up by 74.2 points.

Advance Decline Numbers
Source: nseindia.com

I told him that despite Nifty closing with gains of 0.85%, all the stocks listed on the NSE had not participated in this rally. Approximately one-third of the stocks had gained while rest of the two-third stocks had ended with losses or remained unchanged.
I quickly pulled up the calculator lying on his desk and punched these figures.

519 divided by 1,598. Zip came the answer on the screen - 0.3247.

I told him that, "Despite Nifty ended with gains of 0.85%, only 32.47% of the stocks had registered a gain today. This means that the rally is not broad-based. Only a few stocks have participated in the up move while majority of others (two-thirds) have not, instead they have gone down. So if you are not holding either of those 519 stocks in your portfolio you may have seen your portfolio in the red for today."

"HHhhhhmmmmmmm.........." He said.

I continued, "The health of any market rally depends on the number of stocks participating in the rally. The more number of stocks participate, the healthier it is for the market rally. Think of this from a cricket angle." I reminded him of our school days when we watched cricket only to see Sachin Tendulkar batting. Once Sachin was out and back in the pavilion, we would switch off the Television set. All of us knew that Sachin was the strongest player and he has won many matches single-handedly for India in the past but once he was out, the remaining batting line up wasn't so strong and would struggle till the end for victory. Compare this to the batting line-up and performance of our cricket team now. Many players are match winners and it's a team that performs rather than a ‘one-man show'.

It becomes very difficult to win matches when only 3 players out of 11 are match winners. To increase the chances of winning matches, it would be ideal to see atleast 6-7 players contribute to the team. Same is the case with our markets now. Even for the markets to continue its rally, it is better if atleast more than 50% of the stocks are participating in the advance. I pulled out a rough piece of paper where I had noted down these figures.


Date Nifty Close % Change Advance %
19-Jan-15 8,550.7 0.43% 58.28 %
20-Jan-15 8,695.6 1.69% 53.00 %
21-Jan-15 8,729.5 0.39% 38.78 %
22-Jan-15 8,761.4 0.37% 43.89 %
23-Jan-15 8,835.6 0.85% 32.47 %
Source: Spidersoftwareindia.com, Profithunter

I handed it over to him and pointed to the rightmost column. The Advance % is the column which shows the % of stocks that advanced on that particular date. Over the last week, this number has fallen when the Nifty has advanced. This number is known as the Advance Decline Ratio.

The Advance Decline Ratio measures the degree of participation in an advance or a decline. We can plot this ratio along with the price chart. A rising Advance Decline Ratio with every new high in the index shows strong participation that is bullish. If this ratio fails to keep pace with the index and does not confirm new highs then it shows narrowing participation. Market strength is undermined when fewer stocks participate in an advance. This indicates that the burden to pull the index up the hill is on only on a few heads than the whole team. Narrowing participation by stocks is often referred as weak and a sign of bearish divergence. A bearish divergence normally precedes a market fall as ultimately even those few heads hit their exhaustion limits. And if until then others have not started participating then the index can soon run out of steam. Similarly, market falls can also be broad or narrow. But this ratio gives more reliable signals at tops than at bottoms.

However, one cannot rely completely on this ratio for trading either as this ratio can sometimes be too volatile to give us any meaningful signal. Nonetheless one should always keep a close watch on this ratio to build up a view and get a feel of what's going on beneath the surface.

I could see a twinkle in my friend's eye by now. He had a sense of satisfaction after listening to my explanation which just fell short of the happiness he would have got after suddenly finding a 10 Rupee note from an old pair of jeans.

I finished my cup of tea and he started sipping tea from his cup. Soon after this, our other friends had arrived and we began our Chai pe Charcha........

Advance Decline Ratio on Nifty
Source: Spider Software India.

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8 Responses to "Chai pe Charcha"
Bhakar prajapati
27 Jan, 2015
yes, I have convension with friend on "Chai pe Charcha".I liked good.Like 
Sreekanth
26 Jan, 2015
Hi Apurva, Thanks for sharing the insights of Trading and I believe more will follow. I think as part of the "Swing Trader" (TBD) service, recommendations are going to be Trend based long only no leverage short term opportunities. One of the articles from Profit Hunter said that markets Trend ~ 33% of the times and out of that we are covering only the Long side of the trend. Is there any plan to cover the Short side of the Trend trade (may be using a Futures contract). Regards Sreekanth Like 
Satish Dabholkar
26 Jan, 2015
This gives answer to most of the readers having same question in mindLike 
rkpareek
25 Jan, 2015
Yes same is with me. Almost 5% portfolio down in last 3-4 days .Very knowledgeable this write up .Thanks.Like 
SIBNATH BRAHMA
25 Jan, 2015
I LIKED THE CHAI PE CHARCHA VERY VERY MUCH. IT IS VERY INFORMATIVE FOR INVESTORSLike 
Satish
25 Jan, 2015
Nice article. however a low advance decline ratio can also mean that the rally has just started. or at least that phase of the rally has just started. normally when a market rallies , the FII and HNI buy the key index stocks or stocks which have high liquiditiy and market capitalisation. once this phase is over then the rally spreads to the larger midcaps and then to midcaps and finally to small caps. the percentage gains in the smaller caps is normally larger than the gains in the largecaps. an important signal of the rally coming close to the end is when the small caps rally big time while the largecaps remain where they are. if you see any key reversal of a bull market you will find it was preceded by a huge small cap rally.Like 
Sunil Pal
24 Jan, 2015
Apurva, Very well explained your conversation with friend on "chai pe charcha". I liked very much, keep posting such discussions. Regards, SunilLike 
Subramanian Ram
24 Jan, 2015
The upmove in the Nifty is quite steep. I have read that any sustainable trend shoud be at an angle of 45 degree & anything above may not sustain for a long time. Further the upmove is not confirmed by the MACD which is showing a divergence. We can possibly expect a deep correction. Please correct me if I am wrong.Like 
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