Thursday, August 12, 2010

Why has the Sensex remained rangebound for 10 months?

Many small investors are perplexed about the rangebound Sensex over the past 10 months – trading between 15300 and 18300 in a slightly upward sloping channel.

Of late, the Sensex has been trying to break above the trend line connecting the tops. But every time it has fallen back into the trading range, despite continuous buying by the FIIs.

So what gives? There could be two possible reasons. The first is that most of the Sensex stocks appear fully valued or even over-valued, so action has shifted to the mid and small-cap stocks. The second is that some Sensex-constituent stocks are performing very well, while others have lagged the Sensex.

Trying to analyse the possible first reason would require access to FII buying and selling data that I do not have. It is based on anecdotal evidence. But the second reason can be verified more easily with a quick, back-of-the-envelop calculation.

Here is what I gathered, by comparing the closing prices 10 months ago with that of today’s prices:

Sensex stocks Price on 12.10.09 Price on 12.08.10 % Gain/ (Loss) in 10 months
ACC 796 837 5.1
BHEL 2424 2496 3.0
Bharti Airtel 351 318 (9.4)
Cipla 298 314 5.4
DLF 425 316 (25.6)
Jindal Steel and Power 619 656 6.0
HDFC 2758 2991 8.4
HDFC Bank 1700 2075 22
Hero Honda 1631 1867 14.5
Hindalco 129 167 29.5
HUL 290 266 (8.3)
ICICI Bank 893 964 7.9
Infosys 2240 2779 24.1
ITC 129 153 18.6
Jaiprakash Associates 160 119 (25.6)
Larsen and Toubro 1657 1805 8.9
Mahindra and Mahindra 458 633 38.2
Maruti Suzuki 1516 1226 (19.1)
NTPC 210 195 (7.1)
ONGC 1245 1267 1.8
Reliance Comm 248 173 (30.2)
RIL 1084 972 (10.3)
Reliance Infra 1357 1095 (19.3)
SBI 2173 2784 28.1
Sterlite 170 168 (0.01)
TCS 581 855 47.2
Tata Motors 550 1024 86.2
Tata Power 1319 1329 0.01
Tata Steel 546 520 (4.8)
Wipro 344 413 20
SENSEX 17027 18074 6.1

Only 13 stocks have outperformed the Sensex in the past 10 months. 1 stock was an equal performer. The balance 16 underperformed the Sensex. Not a very scientific experiment, but one that may give us clues for taking investment decisions.

1. The IT pack – Infosys, TCS, Wipro have outperformed

2. SBI and HDFC Bank have outperformed; HDFC and ICICI Bank have marginally outperformed the Sensex

3. Hindalco has outperformed, but Sterlite and Tata Steel have underperformed

4. Hero Honda, M&M and Tata Motors have outperformed; Maruti Suzuki has underperformed

5. Tata Power and NTPC have underperformed; Jindal Steel and Power have given equal performance with the Sensex

6. Bharti Airtel and Reliance Comm have underperformed

7. ITC has outperformed but HUL has underperformed

8. ONGC and RIL have underperformed

9. ACC, BHEL, DLF, Jaiprakash Assoc, Reliance Infra have underperformed; L&T has marginally outperformed

10. Cipla has underperformed

One school of thought says: Tend the flowers and pull out the weeds. Translated into English, it means hold the outperformers and get rid of the underperformers.

While that may be sound logic, it may not necessarily make good investment strategy. If the Sensex has to move above the trading range, the outperformers have to keep performing, but the underperformers need to pick up the baton and start running.

In other words, if you believe that the Sensex is going to move higher, a contrarian bet on the underperformers is likely to provide good gains. That is not a blanket permit to buy all the underperformers. One still has to do due diligence.

This may not be a bad time to pick up Tata Steel, RIL, Sterlite and, on dips, HUL, NTPC, BHEL. The telecomm sector is best avoided.

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