Market Budgeting the Rotation.

JC Parets
January 31, 2022

We have observed significant drawdowns across the market in the last two weeks.
Nifty 50 faced resistance at its October 2021 high which coincides with a critical Fibonacci extension. This time the index marked a lower high.

According to Dow Theory, the Primary trend is intact. Why is that? Because a lower highs and lower low would mark a negative trend. As long as Nifty50 sustains above 16,500, we could just as well see a market that consolidates.

We've mentioned over and over again how Price is what guides us over everything else. But that does not mean that we don't take a peek at different methods of analysis. Other than price, we use multiple tools to analyze the market environment and Seasonality is one of them.

Seasonality tells us about the period when stocks/sectors/indices are subjected to and influenced by recurring tendencies or anomalies.

In this chart, we're looking at the average monthly performance of Nifty 50. As can be seen from the chart below, the index tends to generate negative returns for January and March. Keeping in mind the concept of 'weight of the evidence' we'd rather have seasonality in our favor, than fight historical trends.

Amid the current market weakness, we're observing sectoral rotation. In every market scenario, there are always sectors that outperform and underperform the index. Relative strength is our tool of choice to monitor such developments and use that information in our favour.


The matrix below displays the Sectoral relative strength against Nifty 500. Banks, Public service enterprises, Auto have been holding up in the past weeks, whereas IT has been losing resilience.

A free-float market cap index gives separate weight to each stock which could be misleading sometimes. Therefore, it is essential to know if few stocks lead the index performance or if there is broader participation.

The column chart up next shows the distance of the index as well as its constituent stocks from their respective 52-weak highs.

For example, the Smallcap 100 index is down by just 8%, whereas the average constituent stock is down by 22%. The Microcap index poses a similar observation. It shows the divergence between the headline index and stocks.

Looking at sectoral indices, Nifty Energy is strong, whereas Pharma is the weakest, with the average stock down by 25%.

This week Nifty Energy made a new 8-year high relative to Nifty 50. This move has come much before such an indication at the price level. So a breakout in the price above October 2021 high would be evidence of the confirmation of Energy's leadership.

PSU Bank was the top gainer with a new 52-week high against Nifty 50. Here sustenance above 2,700 is the key level to watch out for.

Nifty IT created a lot of buzz lately. The index has had a glorious 2-year strong bull run. But now, a price breakdown after 5 months of consolidation at a key Fibonacci level signals a potential reversal. We need to monitor if the index re-enters the consolidation range or faces further selling pressure.

Going ahead, we would be looking for opportunities in sectors that continue to display relative strength and have the least overhead supply.

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

Allstarcharts Team

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