The Capitalmind Momentum smallcase has had a rough-and-tumble last week, first with Adani Stocks (of which one is in the CM Momentum smallcase) coming under scrutiny and a late-week broad market correction.

This email is to offer context around what this means and changes we are making in this week's rebalance.

Quick recap of what's happened with Adani stocks

Last week

The apparent trigger was that depository accounts of three Mauritius-based funds that cumulatively own $6 Bn worth of Adani group company shares had been frozen. Funnily, the news was refuted by the depository. While this has no apparent connection with the companies themselves, the company CFO was on financial news channels looking to allay fears about the health of the businesses.

Five of the six Adani stocks ended down last week. Three of them, ADANIPOWER, ATGL, ADANITRANS by 18%.

Adani stocks over the last year

Stocks correct for various reasons, and sometimes for no reason at all, especially if they have had tremendous run ups. Chart below shows the same stocks over the last year.

The "worst" performer in the Adani pack, ADANIPORTS has doubled in the last year. Two stocks, ADANIENT and ATGL have grown nearly 10x in one year.

Given the nature of their moves over the last year, even 20% corrections in a week are only a dent in their overall rise, which may or may not indicate the start of a deeper correction i.e. we don't know what's coming

Adani Stocks in the CM Momentum smallcase

Going by the underlying philosophy of momentum strategies which is to buy what's going up, all Adani stocks have been strong candidates over the last year. From a risk-management perspective, our smallcase did not go beyond two stocks from this stable and with weightage limits.

CM Momentum smallcase held two, ATGL and ADANITRANS at one point. When Adani stocks corrected in April 2021, we:

• exited ADANITRANS at ₹ 971 (having entered at ₹ 446). Since our exit, the stock went to ₹ 1,628 and is now at ₹ 1,240
• reduced ATGL at ₹ 1,092 (entered at ₹ 294) to keep its weight under max limit. Since we reduced, went to ₹ 1,666 and is now at ₹ 1,258

We went with what our rules said but until last week hindsight said it is never a good idea to exit / reduce Adani stocks.

Holding a stock that's falling fast can be unnerving. It can draw all of your attention and become a source of anxiety.

So, here's how to think about such cases: Try and avoid thinking about individual stocks, and about the overall portfolio. We specifically cap exposure to individual stocks for this very reason, so that a deep cut in one or two does not harm the portfolio significantly.

Consider the absolute worst case: Let's say I entered the smallcase on the day ATGL made its high, and now if ATGL were to go to zero (unlikely hypothetical)? Even in such an unlikely scenario, our exposure in the CM Momentum smallcase is under 5%. Most investors should see a lower drawdown on account of ATGL.

Bottomline: Think portfolio, not individual stocks. By keeping weights capped we ensure that the portfolio is not harmed significantly.

What's next?

This week we are exiting 3 stocks, reducing 1 stock, and adding 4 stocks

Exiting ATGL might take a while

ATGL stock hit lower circuits all of last week, falling 5% each day. Circuits are set by the exchange for stocks not in Futures & Options segment. This means the stock cannot rise or fall by more than the limit on any given day. This might continue for a few more days till the price reaches a level that gets interested buyers.

This means, executing the smallcase rebalance on 21st June might result in error for the ATGL sell order if there are no buyers at the lower circuit price ~ ₹ 1,195.

In this case, here's what you'll need to do: Execute the rebalance. If all transactions go through, great. If ATGL sell comes back with an error, then monitor ATGL over the next few days, and repair the smallcase order when it comes out of circuit i.e. has active buyers. This could take a few days.

Other specifics of the latest rebalance will be available by logging onto smallcase and will be available in the rebalance notification email from smallcase.

Note: smallcase sends out an email notification around 10.30am on Monday morning. You don't need to wait for the email and can log into smallcase before market open on Monday morning to see pending rebalance actions.

You can read about past notes on monthly performance here:

​May 2021: What sell in May go away?​

​April 2021: Strong start to the FY22 and new leaders emerge​

​March 2021: A rollicking end to FY21 but markets send mixed signals​