It has been a great bull rally since I wrote the article on pair strategy. The nifty has risen from 4387.90 on 17 aug 09 to 5020.20 on 22 sep 09, an increase of 14% in a matter of 5 weeks. Though we discussed in the article that this strategy is not ideal for bull or bear markets but can be optimally used in volatile sessions, it might not be a bad idea to check the performance.
I wanted to see if the strategy actually works and so compared the prices of IDEA and RCOM. The closing price on 24 sep 09 of both the stocks were Rs. 76.95 and Rs. 305 respectively. The ratio of prices of the two works out to 4.01 which is within our maximum limit of 4.71.
The closing prices tell us that IDEA has seen a fall of about 4%. My view was that "IDEA is overpriced and needs a revision of Rs. 10 (the corrected price should be Rs. 69)". For RCOM, stock has risen by ~ 25%. Regarding this I said "RCOM is under priced by Rs.37, making it a buy with target price of Rs. 282".
Since the strategy was based on only past relation among prices of two stocks, I admit that it is a coincidence that the stocks behaved much like we assumed them to be. But similar analysis and actions based thereon could be a strategy that even a retail investor can venture with.
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