Sector Rotation Drives Nifty Higher

So if the major indexes are going higher, what's driving them? Does everything just go up at once? We think that's unlikely.

Instead, we're expecting weakness in previous leaders like Nifty Pharma and Fast Moving Consumer Goods as money flows out of bigger winners and into areas that have not run as much.

And it's happening at very logical levels.

Here's Nifty Pharma failing at its former highs of 9,500 after a 55% rally over the last month 6 weeks.

Click on chart to enlarge view. 

And on a relative basis, it's also failing at its 2014 lows.

We spoke about the Nifty Fast Moving Consumer Goods Index several weeks ago as it approached its 2013 highs relative to the Nifty 100. Momentum was diverging negatively after a sharp move higher and the reward/risk shifted to the downside. We don't think it's done just yet.

While both of these sectors, Pharma and FMCG, remain vulnerable in the short-term they remain in long-term uptrends on a relative basis. This short-term underperformance we're seeing is likely a buying opportunity within a long-term uptrend...so it all comes down to the timeframe that's relevant to you.

Where is money flowing next? As we discussed in our post yesterday, it's heading into Nifty Financial Services and Banks that have not rallied as much. Momentum is diverging positively and prices have stabilized above a confluence of support. This is constructive, but as we've written there are going to be winners and losers in the space, so it pays to be selective.

Here's the chart on an absolute basis. As we can see, prices stabilized above 9,100 and are now potentially on their way towards 11,250. Given this is the largest sector of the market, strength here will push the major indexes higher in the near-term.

So where are the major indexes and where can they head? Well, as long as prices are above 9,000 in the Nifty 50 then the next level of potential resistance is 10,000.

Mid-Caps continue to lag, but may have another 500 points of upside towards 13,750.

and Small-Caps could see another 400 points of upside towards 4,430.

At that point, we'll reevaluate based on how these indexes react to these potential resistance levels. Longer-term measures of strength like the percentage of stocks reaching overbought territory or above their 200-day moving average remain subdued during this rally.

Should this rally cause those measures to improve materially, then we may shift from the longer-term perspective of selling rallies into buying dips...but we're not there yet for our timeframe. In the short-term, however, the market's telling us the bias remains to the upside.

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

Allstarcharts Team