Despite new recovery highs in the US and other international markets, India has been struggling in the short-term to maintain its upward momentum.
In this post, we’re outlining some things that are important for Equities in the short-term and how we’re approaching stocks on the long side.
First, let’s start with what’s happening in the US market. While Technology stocks take a rest, we’re seeing rotation into the cyclical sectors of the market like Financials, Industrials, and Energy, which held their respective support levels and are now moving to the upside. This is what’s helping drive the continued strength we’re seeing in the major indices in the US, Europe, and elsewhere.
Click on chart to enlarge view.
In India, we’re not seeing that type of rotation. Instead, we’re seeing the largest sector of the market, Nifty Bank, fail to reclaim the 38.2% Fibonacci Retracement of its 2020 decline and momentum fail to reach overbought territory. It will be very difficult for the broader market to go up in the short-term if Nifty Bank is below 22,500 given its 33% weighting in the Nifty.
And in terms of lagging sectors, here’s Nifty Realty breaking support again and making new lows. We’re just not seeing the same sector rotation in India that we’re seeing elsewhere.
Just look at the weakness in Nfity Metal that we highlighted yesterday. With the strength in Base Metals, why has this sector not broken out yet? That’s information in and of itself.
This is the exact type of action we were concerned about last week when we told members that we’d rather be buying weakness in stocks rather than adding exposure at then-current levels. Here are the short-term levels of support we outlined in the major indices that are now broken.
Despite that short-term breakdown, the thesis remains that as long as prices in the Nifty 50 are above 10,000, then the “structural bull market” thesis in stocks that we’ve been talking about for months is intact and we want to be using this weakness to add Equity exposure.
But which stocks do we want to be buying?
Well, we’re not seeing rotation into the areas that are serial underperformers…so we should be sticking with areas of relative strength.
Areas like Fast Moving Consumer Goods which is just beginning a new leg of outperformance. Stocks within the sector like Britannia Industries are sitting at all-time highs, so any weakness back towards its risk management level of 3,475 can be viewed as a buying opportunity.
Or the IT Sector, which is being led higher by the likes of Tata Consultancy and Infosys. If TCS is breaking out to new all-time highs, then our risk is well defined at 2,300 and we can be long for a move up towards 2,790.
Meanwhile, stocks that we were buying near the lows but have yet to meet their upside objective may give us a second chance to buy them lower as they retest support. These are other names to keep on our radar.
To conclude, the evidence is mixed in the short-term, but long-term the weight of the evidence continues to suggest that buying stocks is what we need to be doing…specifically if prices are above 10,000 in the Nifty 50.
The most important aspect here is finding stocks showing relative strength and absolute momentum. By finding those names, we can put the probability of success in our favor, and more importantly, define our risk on the long side in case the market does fall apart again.
A complete collapse is certainly not what we’re expecting, but it’s important to think about the other sides of our trades and how we’ll manage risk in the event that our bull market thesis doesn’t play out.
We’ll be releasing a list of stocks we want to be buying for our Premium Members tomorrow, which is a supplement to the massive Q2 Playbook we put out over the weekend to outline the best themes across asset classes.If you enjoyed this post and want access to that playbook and all of our premium content, start a 30-day risk-free trial. Or sign up for our “Free Chart of the Week” to receive more free research like this.
Thanks for reading and please let us know if you have any questions!