NIFTY breaks up trend from March 2016

Julius de Kempenaer is the creator of Relative Rotational Graphs (RRG), a unique method to visualise relative strength of stocks and sectors. He is the founder and director of RRG Research, Amsterdam. Read more about him here.

In a recent post featured on the stockcharts.com site, Kempenaer discusses the decisive break of the up trend on the long-term weekly chart of Nifty, and identifies some of the sectoral indices (based on his RRG) where investors can hide, or expect some outperformance on the down side.

Remember that a trend - whether up or down - is expected to remain in force till it is decisively broken. Last week's downward break of the up trend is a clear indication that another bear phase (within a longer-term bull market) has started.

For those who are unfamiliar with - or have never heard of - RRG, Kempenaer has clearly explained the concept with notes on his RRG charts.

Shown below is the long-term weekly Nifty chart (from Kempenaer's post):

Read more at:

https://stockcharts.com/articles/chartwatchers/2018/10/nifty-breaks-trend-pharma-and-it-show-relative-strength.html

Sensex is near its lifetime high - which sectors will lead the next leg of the rally?

What a difference a year can make! Sensex was recovering after a year long down trend when the previous post was written. Since then, the index has taken investors on a a topsy-turvy ride - 4 months of up trend followed by 4 months of down trend and then another 4 months of up trend. 

Some sectors that were doing well a year back are not doing so well now. A few sectors that were in complete doldrums have made excellent recoveries. A couple of sectors have remained unaffected by Sensex gyrations.

A smart move will be to stay with the sectors that have not been affected much and look for opportunities in sectors that appear to be on the road to recovery. Partial profit booking can be done in sectors where stock prices have run ahead of fundamentals. 

BSE Auto Index

BSE Auto touched a new high in Sep '16 and corrected with the broader market. The subsequent recovery has not kept pace with Sensex - thanks to strong headwinds. First, demonetisation affected sales. Then, Supreme Court strictures on sale of BS III vehicles dealt a body blow. It may take a couple of quarters to recover.

BSE Bankex

Fortunes of BSE Bankex got a sharp boost from demonetisation - with huge inflows of low cost cash. Loan growth remains muted and NPA problems of PSU banks are far from over. Strong action against habitual loan defaulters is a plus; farm loan waivers by state governments is a minus. Negative divergences on technical indicators hint at some correction or consolidation.

BSE Capital Goods Index

BSE Capital Goods has made an excellent recovery - though still 1000 points short of its Mar '15 peak. Technical indicators are looking quite overbought and are suggesting a correction.

BSE Consumer Durables Index

BSE Consumer Durables remains in a bull market after recovering from a sharp demonetisation-induced correction in Nov '16. The last leg of the rally has been too sharp. Overbought technical indicators may trigger a correction.

BSE FMCG Index

BSE FMCG corrected with Sensex from Sep '16 to Dec '16, and has since moved up to touch new highs.  The index is correcting after forming what looks like a 'double top' reversal pattern. Any dips can be used to buy into this perennial favourite sector of savvy investors.

BSE Healthcare Index

BSE Healthcare is feeling the adverse effects of a double whammy - US FDA strictures against pharma exporters, and DPCA keeping a lid on domestic pharma prices. The days of windfall gains from reverse-engineered generic drugs are over. Those who spend the time, effort and money on R&D and marketing will emerge victorious. 

BSE IT Index

BSE IT is reaping what it had sowed - an over-dependence on 'body-shopping'. New US visa rules may finally put an end to easy money. A lot of small and medium sized IT companies will disappear. The larger ones will survive only if they move up the value chain by strengthening their consultancy activities. 

BSE Metal Index

BSE Metal has had a nice bull ran - thanks to 'anti-dumping' actions against China in US and Europe. An expected pick up in infrastructure projects in India will sustain growth. A consolidation within a 'rectangle' pattern for the past three months may lead to an upward breakout.

BSE Oil & Gas Index

BSE Oil & Gas has done very well - mainly due to low international oil prices. Negative divergences on technical indicators can initiate some correction or consolidation. The sector should continue to do well.

BSE Power Index

BSE Power has run a bit ahead of its fundamentals, and looks ripe for a correction. The government's emphasis on renewable energy may put the future of coal-based power plants in jeopardy.

BSE Realty Index

BSE Realty index may appear to have reversed its fortunes - but remains 500 points short of its Jun '14 peak. Technical indicators are looking overbought. If you are holding stocks from this sector, booking profits and making a down payment on an apartment may be a good idea.

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. 

BSE Sectoral Indices – which ones will lead the next leg of the bull market?

Sensex has undergone a bull market correction after touching a lifetime high in Sep ‘14. FII selling was the main trigger. With BJP likely to form a government in Maharashtra and Haryana, sentiments have turned positive again.

Except BSE Metals and BSE Realty indices, all the other 9 indices are trading above their rising 200 day EMAs in bull markets. Does that make Metals and Realty contrarian plays? The answer is: Yes, for metals; but No, for realty.

What about sectoral leaders for the next leg of the bull market? From the charts, Capital Goods, Oil & Gas and Metals seem to have the best potential. Needless to say, one needs to be stock-specific within each sector.

BSE Auto Index

Passenger vehicle sales slipped in Sep ‘14 but commercial vehicles are showing an up tick – which is a sign of an improving economy. After touching a high in Sep ‘14 with the Sensex, BSE Auto index underwent a bull market correction. The up move has resumed. With inflation moderating, interest rates are likely to come down in the not-too-distant future. This is a ‘buy on dips’ sector.

BSE Bankex

BSE Bankex underwent a sideways consolidation before firmly entering a bull market in Mar ‘14. The index is undergoing another sideways consolidation with an upward bias since May ‘14, and touched a new high during the week. PSU banks may appear to be contrarian plays, but they are still struggling with NPAs. Credit growth is still tepid, but should start picking up in 2015.

BSE Capital Goods Index

After forming a ‘double top’ reversal pattern during Jun-Jul ‘14, BSE Capital Goods index twice corrected down below its 20 day and 50 day EMAs, but did not test its rising 200 day EMA. Economic growth is expected to rise during 2015-16, and interest rates are likely to come down. That should boost the prospects of the sector.

BSE Consumer Durables Index

BSE Consumer Durables index entered a bull market at the end of Mar ‘14 after spending more than 9 months in bear territory. The index formed a small ‘double top’ reversal pattern during Sep-Oct ‘14 and corrected briefly below its 20 day and 50 day EMAs before bouncing back into bull territory. Consumer sentiments are definitely improving – if Dhanteras/Diwali sales are any indication. The index should touch new highs soon.

BSE FMCG Index

BSE FMCG index was one of the leaders till Jul ‘13. A year-long sideways consolidation ended with the index touching a new high in Sep ‘14. A sharp bull market correction ensued, and dropped the index below its 20 day and 50 day EMAs. Don’t expect any fireworks from the sector as rural demand is on a down-swing.

BSE Healthcare Index

With a rising population and increasing per capita income, BSE Healthcare index continues in a strong bull market. More stringent inspection by US FDA authorities may curb export prospects of domestic generic manufacturers. MNC pharma stocks should continue to do well.

BSE IT Index

It has been a bit of a roller-coaster ride for BSE IT index. Export growth is sensitive to forex fluctuations and economic growth (or lack of it) in the western world. Despite recent correction, the index is in a bull market. Stick to the large-cap counters.

BSE Metal Index

A sharp rally after election result euphoria took the BSE Metal index to a new high in Jun ‘14. It has been a steady descent into bear territory since then, as reality hasn’t lived up to expectations of infrastructure growth. It may take another couple of quarters for infrastructure projects to resume in earnest. That means the time to buy is now.

BSE Oil & Gas Index

BSE Oil & Gas index went nowhere till it bounced up into bull territory in Mar ‘14. The index has managed to remain in bull territory despite a long sideways consolidation with a downward bias after touching a high in Jun ‘14. Deregulation of petrol and diesel prices should benefit OMCs. Low oil price in international market should benefit refineries.

BSE Power Index

A ‘triple top’ reversal pattern ended a sharp rally during May ‘14. BSE Power index has drifted down to test support from its 200 day EMA. So far, the support has held. The sector is overly dependent on government policies. There is uncertainty about coal availability. When in doubt, stay out.

BSE Realty Index

A sharp rally into bull territory after a long bear market ended with the high touched in Jun ‘14. Note the negative divergences on ROC and RSI charts (which failed to touch new highs) and a ‘double top’ reversal pattern on Slow stochastic chart. BSE Realty index started a correction that has returned it back where it belongs – in bear country. Avoid.

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.)

Sensex at a new high – which sectors should you pick for investing?

After 5 months of sideways consolidation within a ‘rectangle’ pattern, Sensex appears to have broken out to close at a new lifetime high. Since a previous break out in Dec ‘13 had turned out to be a ‘false’ one, it may take a few more days to convince the doubters of this break out.

From the BSE sectoral charts below, it will be clear that not all sectors are participating equally in the bull market. Some have been frontrunners; others are consolidating or breaking out of consolidations; and a couple are still in bear markets.

There are two ways to play the Sensex bull market break out: (1) stick to the sectors already in a bull run and use dips to add; (2) invest in the sectors that are breaking out of consolidations. Sectors in bear markets should be avoided.

BSE Auto Index

Despite declining auto sales of late, BSE Auto sector is in a bull market. It is consolidating after touching a new high. Daily technical indicators are looking overbought. Some more consolidation can be followed by new highs.

BSE Bankex

BSE Bankex is moving sideways and desperately trying to stay in bull territory. Technical indicators are looking overbought. Some more correction/consolidation is likely. Private sector banks are performing well. Public sector banks are burdened with NPAs and keeping the sector in limbo.

BSE Capital Goods Index

BSE Capital Goods index received good support from its 200 day EMA and has broken out to a new high. Technical indicators are looking overbought, which means a correction/consolidation is around the corner. Stock specific buying recommended.

BSE Consumer Durables Index

Technically, BSE Consumer Durables index is in a bear market, though the index is trading above its 200 day EMA. Technical indicators are looking overbought. A correction is likely. Wait for a convincing move past 6365 to enter.

BSE FMCG Index

After leading the Sensex till Jul ‘13, BSE FMCG index has been in a sideways consolidation. All three EMAs are converging, which is usually followed by a sharp move. Technical indicators are in bullish zones. The sharp move is likely to be upwards.

BSE Healthcare Index

BSE Healthcare index is in a runaway bull market. That means dips can be used to add. Most stocks are trading at high valuations. That doesn’t mean they can’t move even higher. Technical indicators have corrected from overbought conditions but remain in bullish zones.

BSE IT Index

BSE IT index is also in a runaway bull market. Note that all three EMAs had converged in Jun ‘13, followed by a ‘gap up’ upward break out in Jul ‘13. That ‘gap’ has remained unfilled, and is likely to act as support in future.

BSE Metal Index

BSE Metal index rallied back into bull territory from its Aug ‘13 low, but formed a ‘rounding top’ bearish pattern to slip below all three EMAs. The index needs to cross above its Feb ‘14 top of 9433 to break out of the current downtrend. Technical indicators are looking bullish.

BSE Oil & Gas Index

BSE Oil & Gas index has gone nowhere in the past year. It has formed a bullish ‘rounding bottom’ pattern to break out above all three EMAs, but technical indicators have become overbought. A correction is likely.

BSE Power Index

BSE Power index made a couple of forays into bull territory in Dec ‘13 and Jan ‘14. Bears used the opportunities to sell. The sector has too many regulations and is dominated by bankrupt PSUs. Strong reform measures are required to get the sector back on track.

BSE Realty Index

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BSE Realty index is in a long-term bear market with not much hope of revival. The only silver lining is that large and respected players like Tata, Mahindra, Godrej are entering the sector, which is dominated by a bunch of crooked entities. Avoid real estate stocks; buy real estate.

Which sectors will lead the Sensex into a new bull market?

In the previous update to the technical analysis of BSE Sectoral index charts three months back, ‘defensive sectors’ like FMCG and Healthcare were in bull markets that prevented the Sensex from falling down too much. The Auto sector was also holding its own.

Most of the other sectors were in bear markets and dragging the Sensex down. Ever since the Sensex touched its Jun ‘12 low, a flood of FII inflows have changed the bearish sentiment to the point where negative economic news and new scams are being ignored. The Sensex is on the verge of entering a new bull market.

Small investors should start looking at the sectors which are likely to lead the Sensex during the next up move.

BSE Auto Index

After touching a 52 week peak in Apr ‘12 – thus outperforming the Sensex – BSE Auto index faced a sharp correction and dropped below all three EMAs. It has been trading sideways with an upward bias and is back in bull territory. All three EMAs have come close to each other. Technical indicators are looking bullish. A sharp up move is likely.

BSE Bankex

BSE Bankex has been in a bull market since Feb ‘12, except for a brief drop into bear territory in May ‘12. PSU banks have kept the index from moving up, while private banks have kept the index in a bull market.

BSE Capital Goods Index

BSE Capital Goods index is struggling to get out of a bear market. As soon as the economy starts to turn around, this sector should be in the forefront. That doesn’t mean one should buy just any stock from the sector, as many of them have been performing poorly. Stock picking skills will be rewarded.

BSE Consumer Durables Index

Technically, BSE Consumer Durables index has been in a bull market since Feb ‘12. The brief drop into bear territory in Jun ‘12 was not confirmed by a ‘death cross’ of the 50 day EMA below the 200 day EMA. The index has been in a sideways consolidation for the past few weeks, but should start to move up.

BSE FMCG Index

BSE FMCG index has just gone from strength to strength over the past year. In football terms, this sector is like a good goalkeeper who doesn’t get beaten too often. Because of its ‘defensive’ nature, stocks in the sector are perennially expensive and trade at high P/E ratios. Very low debt, little capital expenditure by established players and strong cash flows make this one of the best sectors to invest in.

BSE Healthcare Index

BSE Healthcare index is in a clear bull market. If FMCG sector is the goalkeeper, then Healthcare index is a stopper back that tackles opposing strikers before they can take a shot at goal. Small investors must include a few stocks from FMCG and Healthcare sectors in their portfolio to protect the down side during bear markets.

BSE IT Index

BSE IT index is struggling to get out of a bear market, facing strong resistance from its 200 day EMA. Technical indicators are looking overbought. Some correction or consolidation is expected before the index can move into bull territory. Disappointing performance of Infosys has kept the index subdued.

BSE Metal Index

BSE Metal index is in a bear market, trading below its falling 200 day EMA. Economic slow down has hurt the sector, as capital expenditure and new projects have been kept on hold by many companies. At the first sign of economic revival, stocks from the sector should start moving up. Patient investors may start adding stocks of established companies with global reach.

BSE Oil & Gas Index

BSE Oil & Gas index breached its Dec ‘11 low, but is making a determined effort to get out of a strong bear grip. The recent spurt in the price of RIL has helped the index recover to a large extent. But the index is looking overbought. Some correction or consolidation is likely.

BSE Power Index

BSE Power index tested its Dec ‘11 low in May and Jun ‘12, but did not breach it. That doesn’t mean it will get out of its bear market any time soon. The government should relook at its policies for the sector – otherwise private players who entered the sector will slowly move away. Too many ministries with their own agendas are hurting the growth of the sector. Without adequate power, India’s GDP will grow in low single digits.

BSE Realty Index

BSE Realty index is drifting along in a bear market, with no real sign of a revival. Investors should avoid stocks in this sector. Invest in real estate instead. At least there will be some return on investment.