Problems In India's Realty Sector

Given how concentrated most of the market and sector indexes in India are, we utilize various types of charts to understand what's happening with the individual components that comprise them.

Here's an Equal-Weight vs Cap-Weight ratio chart of the Nifty Realty Index which helps identify how broad or narrow participation is in the sector.

When the ratio is rising, meaning that the Equal-Weight index is outperforming the traditional Cap-Weighted version, it signals broadening participation. When the ratio is falling it signals that fewer stocks in the sector are participating and that the largest market-cap stocks are doing the heavy lifting.

Click on chart to enlarge view.

When assessing a trend's health we want to see more stocks contributing to a rally, not fewer, and is why we often say "sector rotation is the lifeblood of a bull market." Leading stocks can't go up forever, they eventually correct through either time or price, and when they do there needs to be other stocks there to pick up the slack until they begin leading again.

That's not what we're seeing today. Instead, the Cap-Weighted Nifty Realty Index is pressing up against 52-week highs, but under the surface, there are fewer and fewer stocks contributing to the rally...calling into question just how long this strength can continue.

Ultimately we have to trade the indexes we have, not the ones we want. Strength in the Cap-Weighted Nifty Realty Index can continue without the Equally-Weighted version leading. It's happened in the past, it can and will happen again in the future.

Our main point is not that we want to go out and short the Realty sector.

Instead, this development indicates that there may be an opportunity within the individual stocks to play the spread between the weakest component(s) and the broader index that's holding up well.

Our second point is that it's important to keep track of market/sector breadth so that we can identify what's driving the trends we see at the index level. Without knowing the driver it's difficult to identify whether the current trend (or lack thereof) is likely to persist into the future.

Right now the Cap-Weighted Nifty Realty Index looks fine from a price/momentum perspective, but under the surface, the weakness in some components looks likely to continue in the months and quarters ahead.

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Allstarcharts Team