Why FMCG Stocks Are The New IT

First, let's revisit the Nifty IT sector chart where prices were consolidating for about 2 years before finally breaking out on an absolute and relative basis. During that period where prices were rangebound, it saw a lot of false starts and failed to break decisively in one direction or another.

Looking through the components we saw that the primary driver of that weakness was the fact that its two largest components, Tata Consultancy and Infosys, were unable to break out of their own consolidations. Since then, we've seen Infosys and a number of other components break out successfully, which has been more than enough to offset the relative weakness in Tata Consultancy and push the index higher.

Click on chart to enlarge view. 

And here's its 13-year base breakout relative to the broader market.

Now, let's take a look at the Nifty FMCG Index.

Look similar? It should, since prices peaked in the exact same timeframe as Nifty IT back in September 2018, and have gone nowhere since.

Here's a closer look. Notice how momentum is constantly diverging and shifting between a bullish and bearish regime over the last two years. That, along with a flat 200-day moving average signals a lack of long-term trend and continued headaches for both longs and shorts.

And here are prices breaking down on a relative basis after failing to hold its initial breakout level near 2.80. A lack of trend on an absolute basis and a downtrend on a relative basis, which suggests we want to be very selective when picking longs or shorts in this area.

We'd also note that this relative performance is likely not to turn around anytime soon given that Financials, the largest sector component of the Nifty 100, are now breaking out as well. The numerator is falling and the denominator is rising, which makes it tough for this to go anywhere but down from a mathematical perspective.

So, what's driving this mess? Its two largest components failing to make any upward progress.

Here's Hindustan Unilever, stuck in consolidation within its long-term uptrend. Until prices break decisively above 2,540, this will remain rangebound and a major drag on the sector index given its ~29% weighting.

And here's ITC Ltd., consolidating within the context of a downtrend. It's managed to hold long-term support near 190 for the last few months, but until prices start to make new recovery highs, there's nothing for us to do here. At 25% of the Nifty FMCG Index, this remains a major headwind.

Now just because the Nifty FMCG Index doesn't look attractive on an absolute or relative basis, doesn't mean that there are no opportunities in the Consumer Goods space. There remain stocks showing strong absolute momentum and relative strength, so if we need to be participating in this sector at all, we want to focus on those names.

But in terms of sectors with broad-based participation, we want to be looking elsewhere, at least until Hindustan Unilever and ITC Ltd. improve materially and stop weighing the sector down.

Our expectation is that if this bull market in stocks continues, we'll ultimately see an upside resolution like we did in Nifty IT Sector, but we need to remain patient until then.

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

Allstarcharts Team