FMCG Stocks Setting Up For Outperformance

In this post, we're putting aside our broader market thesis that we've outlined (June 28th, June 27th, and June 24th) and focus on a specific sector that may be presenting opportunity on a relative basis.

A few weeks ago we highlighted the Nifty Services Index, but this week we're taking a similar approach and thesis towards the broader Nifty Fast Moving Consumer Goods Index.

Let's get into it.

Here's the Nifty Fast Moving Consumer Goods (FMCG) Index relative to the Nifty 100 Index pulling back to its breakout level from earlier this year, quickly undercutting it, and quickly reversing. Combine this "failed breakdown" with the fact that momentum is still in a bullish regime and we've got a catalyst for its performance to accelerate to the upside again.

Click on chart to enlarge view. 

And on an absolute basis, the Nifty FMCG Index is still messy but is staying above long-term support near 28,000. As long as prices are above that, then it's hard to be too bearish stocks in this space.

Given how top-heavy the index is, it's important to understand how the two largest stocks in the index are performing. If they aren't performing well, then it's unlikely we'll see sustained outperformance from the FMCG Index.

Here's ITC Ltd., which is roughly 28% of the index. On an absolute basis, prices continue to chop around long-term support near 190. That's our line in the sand, if prices are above it then we can't be too bearish and there's potential for prices to work higher towards 265. If we're below 190, then there's 100 points of potential downside.

On a relative basis, this stock has a lot of work to do. It's beginning to stabilize relative to the sector index, but really needs to get back above former support/resistance at 0.077 before we can get too excited about the stock relative to the rest of its peers.

Hindustan Unilever is the second-largest component at 24% and looks much better. It's in the middle of our two former price objectives of 1,630 and 2,540. While it's hard to define our risk and get long the stock at current levels, the bias is still very much to the upside.

On a relative basis, it did put in a failed breakout relative to the sector. We want to see this ratio get back above 0.075 to reconfirm its long-term trend of outperformance.

If this thesis that the Nifty FMCG Index is going to outperform the broader market is working, then we'll likely see ITC above 190 and Hindustan Unilever working higher towards its all-time highs of 2,540. If they are not, it will be hard for this thesis to play out given these two stocks comprise 52% of the index's performance.

Lastly, I want to share a chart of the components of the Nifty FMCG Index in an All Star Charts Equally-Weighted Custom Index. After a brief breakdown below support, prices quickly reclaimed it and are pushing back towards its all-time highs.

What this Equally-Weighted Index suggests is that there is strong breadth in this sector and that we want to be looking at it for long opportunities, both on an absolute and relative basis.