PSU Banks were in complete mess even before Modi Govt came to power in May 2014 -
Majority of the people have no idea. Indian economy is on slippery slope. Some PSU banks will go bankrupt..and then will come lots of misery
— Deepak Singh (@smarket) March 28, 2014
The Modi Govt came to power and it gave some breathing space to PSU Banks but soon the reality took over and Govt's complacency made the matter worse. Most of the PSU Bank stocks started tanking big time. Example: Here's PNB stock chart in 2015 and early 2016
Why PNB - even SBI was down and out in Feb 2016.
Thanks to reckless lending under super guidance of UPA Manmohan and Sonia - SBI trading at lows of CY 2009 pic.twitter.com/Mc2C5HheA3
— Deepak Singh (@smarket) February 22, 2016
The CHANGE: But then things started turning around for PSU Banks in March 2016. SBI was the first to lead the move.
How did PNB stock react to this fundamental news turnaround?
Three Months and Zero Result
PNB stock rallied from levels of 71 to levels of 90 but then skepticism pulled the stocks of the sector down and by May 24 - PNB stock was back at 71. The stock and sector had become avoid again
Please do not get me wrong. I am not mocking anyone. The market is designed in such a way that it fools everybody before making a big move. The logic is simple: The Market accepts the change but it gives a wrong impression to market participants. At turning points, the market makes fool of everybody. The same happened with PSU Bank stocks. Here's PNB stock - up 75% since May 24 2016
PNB stock rise is classically rising from the Ashes. The sector invited everybody in its tranformational journey but not before making fool of large majority
What Lesson can we Learn?
The Market makes the most obvious move in the least obvious way.
Absorb the fundamental News flow and then analyze the charts. Sometimes, when you marry the two - you can get the best possible result. I know it's easy to analyze after the event but remember these episodes teach us a powerful lesson for the future.
In the case of PNB stock - there was double bottom formation i.e. stock price tested the lows twice just when things were turning around fundamentally. It was a conceptual trade which worked in favor of people who were willing to take a bet that yes this fundamental turnaround is for real - An obvious rally done in the least obvious manner.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers