Lack of Leadership Points To Lower Equity Prices

JC Parets
December 10, 2018

Two weeks ago we wrote that the weight of the evidence was suggesting the major indexes in India were getting ready to resume lower. While we were a few days early, most have resolved their consolidations lower. So the question now is, will they continue lower or will they be able to base and head higher? That's the question we're looking to answer in this post.

First let's start with the weakest area of the market, small-caps. Prices were consolidating for about a month in a super tight range, but are now resolving to the downside to continue their long-term downtrend.

Click on chart to enlarge view.

Mid-caps look equally as bad. Nothing in this chart suggests higher prices are ahead, quite the opposite actually.

Large-caps continue to out-perform, but on an absolute basis are range-bound at best with momentum still in a bearish regime.

The out-performance of large-caps continues to signal a lack of risk appetite among market participants.

Additionally, breadth leaves a lot to be desired. We're seeing an expansion of 52-week lows with the index still 7% above its 52-week low. This indicates that the internals of the market are getting worse, not better.

The weakness in the broader market is no surprise given the lack of leadership from its largest sectors.

On an absolute basis the Nifty Financial Services Index has seen price action improve significantly, but the equally-weighted version of the index continues to show relative weakness and remains well off its highs.

The same can be said for the Nifty Bank Index. On a cap-weighted basis the index back to its January highs, but the equally-weighted version is just off 52-week lows.

This is also the case for the Nifty Fast Moving Consumer Goods Index.

And yet again for Energy...

The only major sector showing some semblance of relative strength is IT, however, it only represents 12% of the market and cannot offset the weakness of other areas on its own.

What do all of these equally-weighted charts tell us? Fewer stocks are participating to the upside.

The market doesn't have any upside leadership right now, but it has plenty of stocks leading to the downside. We can't head higher until the majority of these sectors gain their footing on both a cap-weighted and equally-weighted basis. Until then, our bias needs to remain neutral/bearish, which we can express by shorting stocks or holding larger cash positions.

We've outlined many shorts on our trade ideas page that have been working and are meeting downside objectives, so below are thirteen new new names we want to be selling as long as the broader market is weak.

We want to be short Bank of India if prices are below 76.65, with a downside target of 59.50.

We want to be fading strength toward 544 in Capital First Ltd., with a downside target of 325.

We want to be selling a breakdown below 1,200 in CEAT Ltd., with a downside objective of 860.

We want to be short Cholamandalam Investment & Finance Company Ltd. if prices are below 1,245, with a downside target of 915.

We want to be short Coal India if prices are below 238, with a downside target of 110.

We want to be short Hindustan Construction on a break below 10.75, with a downside target of 5.15.

We can be short Interglobe Aviation if below 1,082.50, with a downside target of 812.

We want to be short L&T Finance Holdings if prices are below 142, with a downside target of 112.

We can be short Max Financial Services Ltd. if prices are below 420, with a downside target of 315.

We want to be short Petronet LNG if prices are below 202, with a downside target of 156.

We want to be fading strength in Reliance Infrastructure toward 322.50, with a downside target of 235.

We can be short Syndicate Bank if prices are below 31.15, with a downside target of 21.75.

We want to be short Zee Entertainment Services if prices are below 490, with a downside target of 360.

Our shorts continue to work and meet downside objectives, so we'll stick with the themes that are working until the weight of the evidence suggests something has changed. In the meantime, these are the setups with well-defined risk and attractive reward/risk ratios that we've not discussed in prior posts.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team

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