[Premium] Q4 Playbook (Part 2/3)

January 6, 2020

As we head into 2020, we start from scratch with our Q4 playbook and outline our thoughts on every asset class and our plan to profit in the quarter (and year) ahead.

Part 1 of this playbook will cover our macro view, touching on Equities, Commodities, Currencies, and Rates.

Part 2 of this playbook will delve deeper into Indian Equities, going sector by sector to identify the trends that matter.

Part 3 of this playbook will outline the individual stocks we want to be buying and selling within the context of today's environment.

In this part of the playbook we're gonna go sector by sector and identify what trends we want to be long, what we want to be short, and what we want to be avoiding altogether.

Here's the Nifty Financial Services Index, which remains in a solid uptrend. Although it is stretched in the near-term, any weakness towards 13,000 is a buying opportunity that should be taken advantage of as our long-term target remains 17,400.

Click on chart to enlarge view.

On a relative basis, any weakness in the Nifty Financial Services vs Nifty 500 ratio should also be bought.

The Nifty Bank Index is just about at our 33,000 upside target as momentum diverges. We'd expect some backing and filling here in the near-term, but overall, the trend in this sector remains higher.

Some near-term weakness should be expected, but we want to continue buying dips in this sector as the structural trend is higher.

We wrote about the Nifty Private Bank Index last week, suggesting it could be due for a pause in the near-term. We're getting just that as prices remain above 17,700, but below that we'll be exposed to opportunity cost and downside risk. After a few weeks of consolidation through time and price, we'd expect prices to continue their trend towards 19,000.

Weakness should be expected in the near-term, but the long-term trend remains higher.

Energy continues to consolidate below all-time highs. The structural trend here remains higher, but until Reliance Industries gets going again there's no reason to be overly aggressive here. With that said, other components in the sector look great and therefore we want to be erring on the long side of the sector. Until prices get above 16,500, there's not much to do here.

The Nifty Energy vs Nifty 500 ratio is in a tepid uptrend. No reason to be overly aggressive long or short here, at least until the absolute trend of this sector reaccelerates.

The NIFTY IT Index remains an area we want to be erring on the long side of, however, not until prices get decisively above 16,200. Until then, neutral remains best.

After hitting 15-month lows, the Nifty IT vs Nifty 500 ratio is meandering back into its 2-year range. Neutral is best for now until we get a breakout on an absolute basis.

The Fast Moving Consumer Goods Index is in a very similar situation, stalling out after failing to hold above 31,000. Until we're above that, nothing to do here on an absolute basis.

20-month lows in the Fast Moving Consumer Goods vs Nifty 500 ratio came very quickly over the last 6 months, but there aren't many signs that this near-term trend is going to reverse yet. With that said, we don't want to be short here either, rather patient.

A breakout above 290 allows us to define our risk in the Nifty Realty Index and sets the sector up for a move towards its 2018 highs. As long as prices are above 290, we can be long with a 370 target.

Like Energy, an uptrend (albeit a tepid one) in the Nifty Realty vs Nifty 500 ratio suggests erring on the long side of the sector.

Here's the Nifty Commodities Index attempting to break higher. A move above 3,620 would signal further upside towards 4,000, albeit price action remains messy.

On a relative basis, this looks like an obvious place for the Nifty Commodities Index to bottom versus the broader market. We want to be erring on the long side of this sector in 2020 as long as this ratio is above its 2015 lows.

Metals are in a similar position, albeit a bit cleaner of a setup. Our first target for this rally is 3,055, but above that is 3,550. Momentum getting overbought as prices break the downtrend line suggests this trend has reversed and is now sideways to higher.

On a relative basis the Nifty Metal vs Nifty 500 ratio also looks to have bottomed. As long as prices are above their 2019 lows, we need to be erring on the long side of this sector.

We remain buyers of the Nifty Pharma Index as long as prices are above 8,000. Above that level, its failed breakdown and bullish momentum divergence remain intact and suggest a longer-term target of 10,000. The reward/risk is still very much skewed in favor of the bulls in Pharma.

On a relative basis, the Nifty Pharma Index also looks like it has bottomed. It met our downside target a few months ago as momentum diverged, allowing us to define our risk on the long side for some mean reversion higher. We continue to like Pharma.

The Nifty Infrastructure Index is a bit messy, but if prices can get above 3,450 then that would confirm an uptrend and get us interested on the long side. For now, there's not much to do here.

The Nifty Infrastructure vs Nifty 500 ratio has stopped going down for the last 1.5 years, but has not reversed to the upside yet. As a result we want to continue avoiding this sector altogether until it improves more like the Nifty Commodities and Nifty Metals Indexes have.

The Nifty Auto Index remains a mess. We got our mean reversion towards 8,000 and prices have since consolidated around that level. There's still a lot of overhead supply to work through, so neutral is best as we observe how prices react to resistance near 8,600.

The ratio of Nifty Auto vs Nifty 500 met our downside target and has begun to trend sideways, but is not out of the woods yet. Neutral remains best here as we see how prices work through the massive overhead supply above current levels.

The Nifty Media Index is incredibly weak. As long as prices are below 1,980, we want nothing to do with it on the long side. In fact, we'd be looking to get short if and when we're back in an environment where we want to be shorting stocks. For now, avoid this sector.

New lows in the Nifty Media vs Nifty 500 ratio suggest little has changed here. Avoid this sector on the long side.

The Nifty PSU Bank Index is stuck below overhead supply at 2,680. As long as prices are below that level, the risk remains to the downside in this mess of a sector.