Long-term, we’re bullish Equities in India and around the world, but are remaining patient in the near-term due to momentum and breadth divergences we’ve been seeing across major indexes, sectors, and individual names. It’s happening in the US too.
We’ve been writing about this for a few weeks, so I wanted to follow up today and show the progression of that thesis.
Here’s the Nifty 50, sitting right at its all-time highs as momentum diverges. From a reward/risk perspective there is little reason to be long unless we’re above those former highs and given the divergence, the risk remains clearly to the downside over the near-term.
Click on chart to enlarge view.
Here’s a closer look at that chart. The way I see it, prices are either going to work this divergence off in one of two ways. Either they’ll break below their late March pivot of 11,555, confirm a failed breakout, and continue to correct through price. Or they can consolidate through time and then break out to new all-time highs.
This doesn’t mean we want to be short. Given our long-term bullish thesis for Equities around the world, we want to continue erring on the long side of stocks. It’s more so that tactically it remains tough to be long any of the major indexes at current levels. The risk is not well-defined and the upside potential remains capped in our opinion. Better entries await us.
There are individual names that continue to work and power higher despite the last two weeks of weakness in the broader market, but the majority of stocks still need time to digest gains and set up on the long side again. For now, patience continues to be a great strategy until we see these momentum and breadth divergences work themselves out.
For now, we’re continuing to monitor the Nifty 500 for the stocks and sectors that are most attractive on the long side. That way when we do get an “all clear”, we’re ready to take advantage of the strongest trends.
Patience and cash remain a position. We’ll let you know when that changes.
Thanks for reading and let us know if you have any questions!