Is BrExit offering a good stock-picking opportunity? - a guest post

The BrExit referendum was expected to be a close contest between those who wanted the UK to 'remain' within the Eurozone and those who wanted the UK to 'exit'. The actual result was unexpected. 

Actually, UK was never a fully integrated part of the Eurozone - as they maintained their own currency and visa system. A large number of those who voted for BrExit may have been duped by politicians into thinking that the 'leave' vote was an 'anti-immigration' vote.

The legal negotiations between UK and the Eurozone will start now to make the referendum a reality. That will take till the end of calendar year 2017. Nothing has actually changed on the ground yet. Still, stock markets over-reacted on the downside.

And therein may lie an opportunity. In this month's guest post, Nishit identifies some industry sectors that are unlikely to be affected whether UK eventually leaves the Eurozone or not.   

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BREXIT has happened and the world is behaving as if it is about to end. The stock markets are correcting and this is a time to add several good stocks.

What is BREXIT? It is simply the UK leaving the European Union. All trade agreements made with the EU will not be valid after 2 years (from the date when the UK triggers the Exit clause). Fresh trade agreements will have to be put in place with the UK.

Now, there are several sectors which could be affected, viz. the IT sector as also export dependent sectors like pharma, textiles and auto-ancilliaries. What will happen is that the currency market will be in a state of flux. The Pound will get weaker and the US Dollar will get stronger with safe haven demand. The US will try to devalue the Dollar for its exports to remain competitive.

International Trade will face some hiccoughs. At the same time, there are several sectors which are not dependent on exports. They are purely domestic consumption stories. These are Sugar, FMCG, Packaging and sectors whose products are mainly consumed in India.

A safe bet during these turbulent times would be to focus on sectors which have less exposure to exports and are more focused on the domestic markets. India’s growing middle class will continue to consume, and there will always be demand for soap, hair oil, cooking oil, toothpaste, biscuits, cigarettes, liquor.

Also, with news of a good monsoon, rural demand will pick up. Two wheeler and tractor manufacturers will be in demand. Last 2 years have been drought years so many farmers have not changed their equipment for a substantial time now. A good harvest can led to increase in rural demand.

The Power Sector also is not dependent on external factors ever since Coal India made plentiful coal available. When the markets fall, everything falls and this is a good opportunity to focus on such stories which are not affected by BREXIT.

Such falls give the best buying opportunities. Remember the 'GrExit' drama in August 2013 when the Nifty hit 5118. Those who bought then doubled or tripled their money.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

Sensex is recovering after a year-long bear phase; which sectors will lead the next rally?

After touching a lifetime high in Mar '15, Sensex entered a down trend which has not yet been reversed after 13 months. However, the index has formed a small 'double bottom' reversal pattern in Feb '16 and been in a recovery mode since then.

Almost all sectoral indices have been affected by the prolonged down trend to a greater or lesser extent. As always, there are exceptions. One sectoral index has been in an up trend for the past 2 years. Another has been in a sideways consolidation for the past 13 months. Risk averse investors can buy the better stocks from these two sectors.

Those with a penchant for risk can play contrarian by picking stocks from the sectors that are on the road to recovery. Prudence demands that sectors still in doldrums should be avoided. 

BSE Auto Index

BSE Auto touched a 2 years high in Jan '15 and has been in a down trend since then. Thanks to lower petrol and diesel prices and a falling interest rate regime, auto sales are picking up. Even CV sales are on the rise, indicating economic recovery. The index is in bull territory above its three EMAs, but haven't yet reversed the down trend (marked by blue down trend line).

BSE Bankex

BSE Bankex also touched a 2 years high in Jan '15, and has been in a down trend since then. Its recovery from its Feb '16 low has stalled near its falling 200 day EMA. Large NPAs of PSU banks have kept the index subdued. Comparatively, private banks are performing much better.

BSE Capital Goods Index

BSE Cap. Goods touched a 2 years high in Jul '15, only to suffer a sharp correction. After dropping to a 2 years low in Feb '16, the index formed a 'double bottom' reversal pattern and moved convincingly above the blue down trend line. However, it is trading well below its falling 200 day EMA in bear territory.

BSE Consumer Durables Index

BSE Consumer Durables has been in a bull market for the past 2 years, pleasantly surprising the market with its counter-trend performance. The index touched a 2 years high in Nov '15, and has been consolidating sideways with a slight downward bias since then. It is trading above its three EMAs in a bull market.

BSE FMCG Index

A perennial market favourite, BSE FMCG fell victim to a down trend after touching a 2 years high in Feb '15. Two poor monsoons in a row played spoilsport for the sector. Early forecasts of this year's monsoon have indicated a rain surplus. The index has duly breached its down trend line, but it hasn't been a convincing breach yet.

BSE Healthcare Index

BSE Healthcare was in a bull market till Oct '15 when it formed a 'triple top' reversal pattern and entered a down trend. The index is trading below its down trend line and its 200 day EMA in bear territory. FDA strictures against several well-known pharma companies has put a question mark on future growth of the export market. Domestic market has also been affected by price control and government regulation against combined dosages.

BSE IT Index

BSE IT touched a 2 years high in Mar '15 and entered a sideways consolidation within a large 'pennant' pattern. Despite Rupee devaluation, IT companies have not benefitted much due to slow growth in Europe and visa strictures in USA. Market leaders should be able to overcome these near-term issues. Avoid the mid-cap and small-cap companies.

BSE Metal Index

BSE Metal has been a victim of the commodity down cycle - correcting more than 50% from its Jun '14 top. The index is facing resistance from its 200 day EMA. Contrarian investors can pick market leaders, but need to remain patient.

BSE Oil & Gas Index

BSE Oil & Gas has been correcting since touching a 2 years high in Jun '14. Despite lower prices in the international market, higher duties locally and price control have proved detrimental to profitability. The index is trading in bull territory above its three EMAs but remains in a down trend.

BSE Power Index

BSE Power is a sector investors should not touch with a 10 ft. pole. Too much government interference, rampant power theft and poor performance of state electricity boards have turned this sector into a basket case.

BSE Realty Index

BSE Realty is a clear avoid for investors. The index is in a 2 years long down trend and may not be able to reverse the trend anytime soon. However, there may be no better time like now to invest in an apartment or house for personal use. 

Top-down Analysis: Finding the Right Sectors and Stocks

The stock market seems to be recovering from a year-long correction. Experts and analysts are suggesting that the next leg of a long-term bull market is about to unfold.

This is a good time for new investors to start building an investment portfolio. Note that I haven't mentioned anything about buying stocks just yet. 

Building an investment portfolio that will generate inflation-beating returns for many years requires careful planning and analysis. So, how should you begin the process?

Ideally, you should get in touch with a financial planner who will hand-hold you through the process of preparing a financial plan based on your current and future earnings and financial commitments.

Another option is to spend some time on research about how to prepare a financial plan, and do it yourself. It is not rocket science. Basic math skills and accounting knowledge is good enough.

Next, properly assess your risk tolerance. There are tools available to do such an assessment.

Based on your financial plan and risk tolerance, an asset allocation plan should be prepared. What is the necessity of an asset allocation plan? 

It diversifies your investments among different asset classes - like equity, mutual funds, fixed income instruments, gold - to enable better returns under different market conditions.

Now you are ready to build your investment portfolio according to your financial plan, risk tolerance and asset allocation plan.

To beat inflation, you have to invest in equity shares. It is not just about opening trading and demat accounts. You need to know which stocks to buy. 

For that, you need to go through another process, called Top-down Analysis - where you figure out how the economy is doing and which sectors are likely to perform better during the next leg of the bull market.

It helps to have some knowledge of the business processes in the identified sectors. 

If you have identified FMCG sector as a potential money-spinner due to the thrust on rural income by the government, you need to know that companies in the sector typically have huge advertisement costs, strong cash flows, low capex, well-known brands, high P/E, low growth, good dividend payouts.

You can choose the top two or three companies based on their rural distribution reach. Repeat the exercise for three or four more sectors to get adequate diversification. 

Now you have 10-12 stocks from three-four sectors for the equity part of your portfolio.

Read more about Top-down Analysis here.

Related Post

How to Pick Stocks for Investment - Part II

How to Select a Company for Investment - a guest post

The long correction since Mar '15 in the Indian stock market may have finally come to an end. The time for a pre-budget rally has arrived. If you were waiting to enter the market, don't wait any more.

But which stocks should you buy from the hundreds that trade every day? Buying a stock is not buying a piece of paper (or an entry in a demat account). You are buying a 'share' of a business.

In this month's guest post, Nishit explains how you should go about selecting different companies for investment. Promoter integrity is at the top of his selection criteria.

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The Indian economy is showing signs of green shoots and we are in the take off state right now.  People who I meet often ask me how to select a company for investment. There are many things which go into the selection of a company but the most important parameters for me are Corporate Governance, Ethics and Transparency.

I usually look at where the broad economy is going and from that I identify which sectors will do well. Once the sectors are identified, next is identifying companies within the sectors. Investing in a company with a crooked promoter in a good sector will still lose you money. An honest promoter is the most important yardstick while selecting a company.

Promoters can make mistakes which are acceptable; skimming off money from the shareholders is not. Satyam is a prime example of a blue chip company in a very exciting sector of IT going bad. Satyam not only jeopardized the jobs of its employees, eroded shareholder value, it also shook the confidence within the IT industry.

If I was a foreigner waiting to invest in India, I would constantly think which other Satyam was lurking in the wings in the Indian IT industry. Now if we were to compare this with a TCS or Infosys or even a Wipro, the promoter ethics are above board. Wipro might be slow to change but at least we know that the promoter is not skimming off money.

This is the very reason the Tata group of companies is my favorite while investing. With their long history and illustrious background, there is very little chance of fraud happening with the Tata companies. They may be slow to change, there could be some mishaps in decision making but that is acceptable.

If I am assured of promoter honesty then 50% of my worries are taken care of. Stock picking is an art. I normally make up my mind in 30 minutes whether or not to buy or not to buy a stock. If I cannot decide in 30 minutes it means there is something wrong somewhere.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

Related Posts

Market Cycles and Sectors

Which Sectors should you Invest in?

5 Must-Have Metrics For Value Investors

The investopedia.com web site is one of my favourites because they have such a wide variety of useful articles and tutorials aimed at small investors. Whether you are interested in learning about fundamental analysis or technical analysis, trading or investing, equity market or debt market – you will find something of interest.

For most small investors interested in the equity market, the place to start should be to learn as much as possible about the company whose stock you wish to buy. But the problem for many small investors is: which companies to choose from the thousands that are listed in the stock exchanges.

There are no formulas or rules that work for every one. The concept of “Circle of Competence” has been recommended by Warren Buffett. It means investing in the stocks of only those companies whose businesses you clearly understand. You should be able to assess with reasonable certainty their business model, competitive advantage, strengths and weaknesses, future growth possibilities.

What if your “Circle of Competence” is very limited? You are not in a minority of one. The “Circle of Competence” expands with experience. What to do till then? Stick to sectors that are known for consistent performance over many years. Such as? FMCG, Pharma, Financial Services. You don’t need to own stocks in 20 different sectors. Owning a couple of good companies in 3 or 4 sectors should be enough for a core portfolio.

Once you have decided on the sectors, you need to go through fundamental analysis to identify the better stocks from each sector. In a recent article by Jonas Elmerraji, 5 important metrics for value investors have been explained. Read the article at this link.

Related Posts

Which sectors should you invest in?

How small investors can widen their Circle of Competence

Comparing returns of BSE Sectoral indices – a guest post

Now that even die-hard bears are also coming around to the notion that the Indian stock market is in a bull phase – though it has been so since the low of Dec ‘11, it is as good a time as any to look at sectoral performances to assess where to invest.

In a guest post, Niteen analyses data to show the outperforming and underperforming sectors over various time frames. A contrarian approach would be to invest in the underperforming sectors – but not blindly. One still has to be stock specific.

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The market is moving fast and especially stocks from ‘beaten down’ sectors have performed really well. So I thought of doing a reality check to see how returns look like for stocks from beaten down sectors compared to what they were when the market had peaked about 5 years ago.

• The sectors which were continuously outperforming include Banking, Healthcare, Consumer Durables, Auto and IT. FMCG also outperformed in all these years except the last one year
• The sectors which underperformed during last 7 years consistently include Capital Goods, Metal, Oil, Power, Realty and PSU
• Capital Goods started performing in last 2 years. But if someone bought a stock which was a part of the Capital Goods index 7 years ago then the person earned just 5% YoY return
• These underperforming sectors were, in a way, just waiting for the right opportunity to give returns and that has happened. The contrarian approach worked well. I have delivered one presentation on Contrarian approach in stock market with a backdrop of Public Sector banks (see here)
• These underperforming sectors might be showing good returns of last one year, but still they are either flat or have given negative returns over a longer period of 3-7 years. So there still is significant value left in these sectors/companies if we could go back to a GDP growth rate of 7% and above prevailing around 5 years ago. This may now look possible considering the systemic risk coming down in the market quickly
• One may also notice that all sectors gave double digit growth over 10 and 15 years durations. It proves the point that longer the holding the better the likely returns

Criteria:

• The returns are CAGR
• Performance benchmark is kept at 10% which is between the Sensex return over 15 years and average inflation rate of 7%
• If returns are lower than 10% then the stocks which were part of the index have underperformed
• If returns are above 10% then the stocks which were part of the index have outperformed

Acknowledgement: Vinit Bolinjkar, founder Academic Toppers (click here), helped me in getting the data for this analysis.

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(Niteen is an MBA and cleared CFA Level 2, CFA Institute USA. He also conducts investor education sessions, writes blogs. A firm believer in long-term financial planning, and a 20 years veteran of the stock market, he likes to analyse the economy, and individual stocks.

Niteen blogs at Investment ideas.)

Modi effect on stock market – a guest post

After all the debate, discussion and anticipation, the Modi government has been sworn in and the council of ministers announced. The suspense of what will happen and who will get which ministry is over. Now it is time for getting down to business.

The first salvos have been fired by the PM – by first inviting heads of SAARC governments to the swearing-in ceremony and holding one-on-one discussions with them about bilateral issues and then, by setting up a SIT for unearthing black money in the economy. The first was an unexpected courtesy to our neighbours. The second is typical no-nonsense ‘walking the talk’.

What will Modi’s effect be on the stock market? In this month’s guest post, Nishit takes a look at the sectors that are likely to lead the next up moves in the stock indices if Modi continues to deliver on his poll promises.

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My previous month’s guest post began this way: “The market is going up as if there is no ceiling. Every day one sees their portfolios increase in value and everyone seems to be getting swept up by the Modi wave. Now, let us try and see what can derail this rally.”

Now, Modi has won the elections with a huge mandate. What next?

The first 6 months to 1 year are the honeymoon period for any Government. This is the period when they are given a degree of latitude. This is the time when the markets have hope in the new Government.

The new Government has promised jobs, growth and progress. How will they do this?

Firstly, they have to tackle the infrastructure mess by clearing road projects and making coal available to the power plants. Stocks of Infrastructure and power companies would start moving once these road blocks are cleared.

Next, finance has to be provided for these projects. Banking and infrastructure lenders will be the next to move up. As provider of materials for infrastructure to be built, steel and cement companies will be the next ones to rise.

In the midst of all this, IT and Pharma stocks, which are seen as defensives and export oriented, will lag behind. This is because the rupee has strengthened which may lead to their profits being curtailed.

PSU stocks should be another category which needs to be watched closely. Gujarat government stocks have done well under Modi.

Also, company stocks of a few industrialists perceived to be close to Modi, like the Adanis and the Ambanis, need to be closely watched.

These are interesting times we live in. For the first 6 months and especially during the time till the Union Budget in mid-July, the markets may rise on hope. After Diwali, emphasis will shift to the performance and results delivered by the new Government.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

eBook: Technical Analysis – an Introduction

As regular readers already know, I have been writing a blog for more than 3 years to educate new investors about investing in the stock market. The experience so far has been quite enriching for me, and hopefully, beneficial for some of the readers.

The stock market can be a fascinating place or a fearsome place – sort of like bathing in the sea. The first few attempts are usually quite humbling – specially if the sea has large waves that keep constantly crashing on to the shore.

The uneducated can get thrown and dashed around by the waves – hurting pride and self-confidence. In extreme cases, the sea waves can drag out the hapless to a watery grave.

To the experienced sea bather, there can be nothing more exhilarating, invigorating and even relaxing. Jumping up to let the smaller waves flow through, diving under the really big breakers, then swimming out and letting the waves gently carry you back to shore is great fun and builds up a healthy appetite.

Likewise for the stock market. The inexperienced buy to find their stock going down, sell to find the stock going up, spend sleepless nights thinking how to salvage their losses – and in extreme cases, commit suicide.

Of those who have been through the experience, some leave the market permanently blaming brokers, operators, market manipulators, friends who gave wrong tips – in fact any one except themselves. Those who stick around to fight another day, try to learn the ropes by reading, or following the advice of experienced market players.

My earlier eBook: How to become a better investor, was published exactly two years ago on New Year Eve. It contained general advice about sector and portfolio selection, and strategies about how and when to invest without losing a lot of money. Several hundred eBooks were emailed – and may have helped a few readers to become better investors. That eBook is now being ‘retired’ – it will no longer be emailed, but will be available for reading on a different blog.

Many of the posts on this blog are about technical analysis of chart patterns. Several readers had requested me to write an eBook on technical analysis, so that the important information can be available easily in one place. After remaining on the anvil for nearly a year, it is finally ready.

Like the previous eBook, this one is also being provided to my blog readers for free - but on two conditions:

First, you need to specifically ask for the free eBook by sending me an email at mobugobu@yahoo.com with your full name. Hiding behind a pseudonym won't help! I would like to avoid spammers to the extent possible.

Second, you can ask your friends, relatives, colleagues to send me an email for the eBook (or send them a link to this blog post) - but please do not forward the eBook to others without my permission. I don't want the eBook to be freely circulated over the Internet.

The eBook has been compiled from selected blog posts and some new material. It is meant to be an introduction to the subject of technical analysis, with a handful of important concepts that are more than enough to arouse the curiosity of those who want to learn more.

2011 has been a disappointing bearish year for most small investors. Please consider this eBook as a small gift towards making 2012 a happier and more prosperous year. Needless to say, your comments and feedback will be most welcome.

Stock Index Chart Patterns - BSE Sectoral Indices, Dec 23, '10

I had taken a look at the chart patterns of the BSE Sectoral Indices two months back, when the Sensex was heading towards its new high. Not surprisingly, many of the sectoral indices reached their new highs simultaneously. But some had already started to correct.

Time to take another look after the corrective move of the past two months to check where the strengths and weaknesses lie for investing in 2011.

BSE Auto Index

The BSE Auto index continues its strong performance, consolidating sideways rather than correcting down too much. Note that the RSI failed to make a new high with the index in Nov ‘10, and has dropped below the 50% level. As long as the index stays above the support level of 9670 and the rising 100 day EMA, the bull market will be under no threat.

BSE Bankex

The BSE Bankex has taken quite a knock on the chin – thanks to the bribe-for-loan scam, and is trying to cling on to the support level of 12640. The RSI is on the verge of dropping back into the oversold zone. The correction may continue for a while longer. Investors need to be very stock specific.

BSE Capital Goods Index

The BSE Capital Goods index corrected all the way down to the 200 day EMA, and is struggling to stay above its long-term moving average. The RSI has dropped below the 50% level and is hinting at another test of support from the 200 day EMA. Rising interest rates and tightening liquidity situation may be hurting profitability.

BSE Consumer Durables Index

The BSE Consumer Durables index has corrected nearly 25% from its peak, underperforming the Sensex. High input costs have started affecting wafer thin margins in spite of good sales. The RSI is at the edge of the oversold zone, indicating that there may be another drop towards the 200 day EMA.

BSE FMCG Index

The FMCG index formed a bearish double-top pattern, but the correction has received good support from the rising 100 day EMA. But up moves are finding resistance from the sliding 20 day and 50 day EMAs. The RSI is below the 50% level. The index may consolidate sideways for some time. The index corrected 8% from its top and marginally outperformed the Sensex during the recent correction.

This is my favourite sector because of its strong cash flows, good dividends and low volatility.

BSE Healthcare Index

The BSE Healthcare index also formed a bearish double-top pattern but found support at its rising 50 day EMA. It has barely corrected 5% from its peak and has outperformed the Sensex. No wonder the sector is called ‘defensive’.

BSE IT Index

The BSE IT index has been a spectacular outperformer, though the RSI is indicating an overbought situation. The gradual economic recovery in USA and Europe have boosted sentiments. Investors would do well to stick to frontline stocks. Employee attrition has become a problem that affects the small and mid-cap IT companies a lot more.

BSE Metal Index

The BSE Metal index hasn’t made any progress in the past two months. The bullish pattern failed to play out, and the index continues to oscillate around its 100 day EMA. Unless it clears its Apr ‘10 top, investors may not reap much gains. However, Tata Steel and Hindalco looks good and may be bought on dips.

BSE Oil & Gas Index

The BSE Oil & Gas index fell steeply below its 200 day EMA after reaching a new peak in Nov ‘10, but has recovered quickly above all four EMAs. Note that the RSI made a lower top in Nov ‘10, heralding the correction. This time around it has made a higher top while the index made a lower one – which is a bullish sign. Investors can look at Indraprastha Gas on dips.

BSE Power Index

The BSE Power index corrected steeply to its 52 week low within two months of hitting its 52 week high in Oct ‘10, and hasn’t been able to recover much at all. The sector has been overhyped and it is finally dawning on investors that most of the expansion projects are behind schedule, and profits are likely to be muted. The sector has dropped into a bear market. Avoid.

BSE Realty Index

The less said about the BSE Realty index the better. This darling of the previous bull market is down where it belongs – in the dumps. Prices were artificially boosted through cartelisation and hoarding of commercial and residential inventory. The time for reckoning has arrived. Stay far away.

Stock Index Chart Patterns - BSE Sectoral Indices, Oct 22, '10

BSE Auto Index

The BSE Auto index chart continues its strong upward move. A bit of correction set in after touching another new high in Oct ‘10. The 20 day EMA has provided good support. The RSI has dropped below the 50% level and is making lower top and bottoms. The correction may not be over yet.

BSE Bankex

The BSE Bankex chart also touched a new high this month before starting to correct. It dropped below the 20 day EMA before recovering. The RSI is making lower tops and bottoms and has fallen below the 50% level. The index may correct some more.

BSE Capital Goods Index

The BSE Capital Goods index touched a new high in Oct ‘10 before correcting sharply down to the 50 day EMA.. Though the index has made higher tops and bottoms last week, the RSI has done the opposite – making lower tops and bottoms and hinting at a longer correction.

BSE Consumer Durables Index

The BSE Consumer Durables index fell less sharply after touching a new high. But even as it tries to recover, the RSI is diving towards the oversold zone.

BSE FMCG Index

The BSE FMCG index made a new high right at the beginning of the month and immediately started a correction that went down to the rising 50 day EMA. The RSI bounced up after touching the oversold zone, but remains below the 50% level – which is bearish.

BSE Healthcare Index

The BSE Healthcare index chart has been the outstanding performer in Oct ‘10. The RSI is in the overbought zone, but it has made a lower top as the index made a new high. A correction may be around the corner.

BSE IT Index

The BSE IT index also made a new high in Oct ‘10, dropped like a stone below the 20 day EMA and then recovered quickly. The RSI has bounced up after touching the 50% level – which is a bullish sign.

BSE Metal Index

The BSE Metal index chart rose higher during the month, but failed to get close to its 52 week high of Apr ‘10. It started a correction and is currently below the 20 day EMA. The RSI has rapidly fallen below the 50% level. The chart seems to be forming the ‘handle’ of a bullish cup-and-handle pattern.

BSE Midcap Index

The BSE Midcap index chart is performing quite well, touching a new high, correcting down to the 20 day EMA and almost recovering its losses. The RSI has made a series of lower tops in the overbought zone as the index has moved higher during the past 3 months, but is above the 50% level.

BSE Oil & Gas Index

Finally, some action from the BSE Oil & Gas index chart. It reached a new high in Oct ‘10, dropped below the 20 day EMA and is testing its high. The RSI is showing negative divergence but is above the 50% level.

BSE Power Index

The BSE Power index chart flattered only to deceive. It touched a 52 week high and immediately started falling and slipped below the 50 day EMA. It has recovered up to the 20 day EMA, but the RSI is headed down to the oversold zone – indicating that the correction may not be over.

BSE PSU Index

The BSE PSU index chart is in the process of forming the ‘handle’ of a bullish cup-and-handle pattern. It made a new high this month before dropping below the 20 day EMA. The RSI is just below the 50% level.

BSE Realty Index

The BSE Realty index chart is the underperformer of the group – making a series of higher tops and bottoms since the low in May ‘10 but failing to reach a new 52 week high. The recent correction has dropped the index below the 20 day EMA. The RSI has quickly fallen below the 50% level.

BSE Smallcap Index

The BSE Smallcap index chart is performing well, much like its Midcap counterpart. The RSI has made lower tops in the overbought zone in the past 3 months, and is just below the overbought zone.

The chart patterns of the BSE Sectoral indices are in corrective modes after touching new highs. The BSE Healthcare index gets the ‘chart of the month’ award.

Stock Index Chart Patterns - BSE Sectoral Indices, Sep 24, '10

I had written a detailed analysis of the NSE Nifty index chart pattern yesterday. Hope you liked reading it. On Tuesday and Thursday, I had written about the investment tactics to follow after the Sensex chart touched the 20000 mark.

Instead of writing a detailed analysis of the BSE Sensex index chart pattern today, I thought of taking a look at the BSE Sectoral index chart patterns. My previous look at the BSE Sectoral indices was back in May ‘10, when almost all the indices were under some selling pressure.

It will be interesting to see if the Sectoral indices are near their 52 week highs or not. The ones that are not, could be on the sector-rotation target of the bulls. Here are the charts:

BSE Auto Index

The BSE Auto index is in a confirmed bull market – making higher tops and bottoms. No sign of the prolonged consolidation of the Sensex. Consumer vehicles, cars, two-wheelers are all enjoying booming sales.

BSE Bankex

The BSE Bankex consolidated sideways till Jul ‘10, before breaking out in Aug ‘10. After a brief pullback, it has raced away along with the Sensex. The banking system is the backbone of a strong financial system. Thanks to prompt RBI interventions at appropriate times, the banks have emerged stronger from the 2008 downturn.

BSE Capital Goods Index

The BSE Capital Goods index consolidated sideways till Jun ‘10; gave a false breakout in Jul ‘10; consolidated some more in Aug ‘10 before finally breaking out to touch its 52 week high last week. The Capital Goods sector hasn’t performed as well as the Auto index and the Bankex – but their time will come.

BSE Consumer Durables Index

The BSE Consumer Durables index has been one of the better performers in the past 12 months, and remains in a strong bull market.

BSE FMCG Index

The BSE FMCG index went nowhere till May ‘10; broke out upwards in Jun ‘10; consolidated sideways in Jul ‘10. From Aug ‘10 onwards, it has been rising in a parabola, and looks like it isn’t done yet.

BSE Healthcare Index

The BSE Healthcare index has been in a steady bull market with occasional corrections. The upward momentum seems to be slowing down a bit.

BSE IT Index

 

The BSE IT index has understandably not performed all that well – due to the poor recovery of the European and US economies. It broke out of a long sideways consolidation earlier this month.

BSE Metal Index

The BSE Metal index has been one of the poor performers, and is far below its 52 week high touched in Apr ‘10. That may be an opportunity for savvy investors.

BSE Midcap Index

The BSE Midcap index broke above a long sideways consolidation in Jul ‘10 and has since been moving up steadily, rather than sharply. Looks like there is steam left in this rally.

BSE Oil & Gas Index

The BSE Oil & Gas index has gone neither up nor down, and been one of the disappointments – thanks to meddling by the Government in the oil PSUs, and lacklustre performances by Aban and RIL. Diesel price decontrol may improve the sector’s prospects.

BSE Power Index

The BSE Power index has been an underperformer and remains below the 52 week high touched back in Jan ‘10. This sector has been hyped up too much and has delivered too little. Power theft and transmission losses need to be curbed.

BSE PSU Index

The BSE PSU index has formed a cup-and-handle pattern which could lead to a strong up move. The index comprises companies that are a part of many of the other sectoral indices – like Bankex, Power, Oil & Gas.

BSE Realty Index

The BSE Realty index, one of the stars of the previous bull market, has been the worst performer in the past year. It is trying to emerge from a severe bear attack, and is not out of the woods yet. Just because it is performing badly does not make it a good contrarian play.

BSE Smallcap Index

The BSE Smallcap index is in fine fettle, and going from strength to strength. Please remember that there are more than 500 stocks that comprise the index – some of them are real gems, and others are complete junk. So stock selection has to be done very carefully.