Over the past 14 years, the Indian stock market has seen the advent of a number of analysts and arrival of real-time stock projections. So much so often it becomes confusing for investors to decide whom to believe and whom not to. In this maze of numbers, the philosophy of investing on the basis of common sense has taken a backseat.

There is no denying that an analyst’s projections are helpful, but often and in a large number of cases, an analyst doesn’t take into account the realities of the broader economy, which is when such predictions tend to go awry.

For example, an analyst covering the consumer durables sector will not be able to take into account the slowdown in the earnings of a company due to a financial crisis of the kind we saw in 2008. If you had kept holding consumer durables stocks simply because the analyst didn’t downgrade his earning estimates, it is likely that you would be sitting in a loss.

Just remember how few ‘sell’ recommendations you had seen at the height of the bull run in late 2007. This even when the overall market valuations and most individual companies were quoting at price-to-earnings multiples that were unheard off. This was also true with the number of ‘buy’ recommendations one saw at the bottom of the market. However, in this case at least there were a few brave hearts who had come out with buy recommendations. But their targets were so conservative that they could never go wrong.

While this maze of analyst reports have their own market, retail investors can also make do with what we call common-sense investing — which is about reading some basic indications from the broader economy and watching the movement of specific categories of stocks that give reliable and advance signals of an impending market trend.

Before we get into these signals and indicators, here is rider. This piece of advice is not for traders. It is for only those investors who make investment with a horizon of more than one year. But given the new standards and aggressive style of investing, this breed of investors is few and far between.

Market trend analysis over the years shows the first signal on the future direction of the market comes from auto stocks — be it Tata Motors, Mahindra and Mahindra or Hero Honda. These stocks start under-performing the market indices before the broader market turns bearish. If you look at the charts of the indices and these stocks for the past 15 years, this trend stands out very clearly.

For instance, look at the performance of M&M between 2003 and 2008. The scrip was performing in line with the broader market till March, 2007. After March 2007, it started under-performing the broader market, while the Nifty was still making new highs. But M&M was moving within a trading range and was unable to form a new high. In January 2008, when the broader market crashed, M&M too dipped sharply along with indices. (See chart)

It’s the same case with Tata Mot-ors. This scrip was performing in line with the market indices till early 2007, but strongly under-performed the broader market in 2007 when its production numbers were robust.

This divergence emerges not just ahead of a bear phase. Even when a bull phase comes, the auto stocks are the first to see an upward trend and they start outperforming the broader market. These stocks do not fall in line with the indices when the broader market forms a bottom.

You don’t have to go back too far to read this trend. Look at the performance of most auto stocks since October 2008. M&M was the first to start outperforming the indices by moving upward gradually. After the overall market was able to come out of the bear phase, the auto stocks turned out to be the best performers.

Simple economics explains this behaviour of auto stocks. When there is a slowdown in the economy, on the ground the movement of good across the country slows down. The moment this happens, demand for new heavy commercial vehicles (trucks) from transporters and cargo companies comes down. That is the first sign that the broader economy is going to turn sluggish. However, it takes a while before this situation starts reflecting in government data and economic numbers.

Similarly, at the time of a recovery, the first signs appear in the rise in the movement of goods in tier-II and tier-II cities and rural India and, accordingly, the auto numbers start improving. The economic data can catch such a recovery much latter.

Another sector that enjoys a similar connection with the broader economy is cement. More often than not, these stocks start under-performing the broader market much before the market turns bearish. For example, a quick look at the stock performance of ACC and Ultratech (in charts) shows they had turned weak almost a quarter before the broader market turned bearish.

Smart investors read these signs and take positions in the market much ahead of the beginning of a trend. So next time the auto and cement stocks start under-performing the indices for more than a quarter, you know it’s time to be careful as this could be the first sign that a bear phase is round the corner.

(The writer is director of independent brokerage Elan Equity Services.)