The current market environment remains choppy, so we want to revisit a sector that’s showing relative strength, Pharma.
In November we pointed to the improving prospects of the Nifty Pharma Index and its components, following up with additional trades in January.
Today, we want to revisit the sector to see what’s changed and what stocks we want to be buying and selling.
First, let’s start with the Nifty Pharma vs Nifty 500 ratio chart that continues to turn higher after meeting our downside objective late last year. This continues to suggest further outperformance from the Nifty Pharma sector relative to the broader market.
Click on chart to enlarge view.
Looking at the Nifty Pharma Index on an absolute basis is where things get a bit tricky. Prices confirmed a failed breakdown and bullish momentum divergence by closing back above 8,000, but failed to accelerate higher in a meaningful way.
With prices chopping around 8,000, any trades at the index level are likely to whipsaw longs and shorts in and out of their positions, so we’d rather be approaching this sector at the individual stock level where there are a lot of names showing relative strength with well-defined risk.
Before we get into the individual names we like, we thought it’d be helpful to point out a large part of what’s holding the index back. Much like the IT sector, Pharma’s largest component, Sun Pharma, makes up roughly 22% of the index and remains weak.
After failing to confirm a trend reversal in September 2018, the stock has continued to struggle, stuck in a year-long range of lower highs and continued support at 365. For now, this looks like a bearish continuation pattern that would target 281 on the downside if the lows of 365 are broken decisively.
Until Sun Pharma stock can gain its footing and begin to trend higher, the Nifty Pharma Index is unlikely to gain sustainable upside traction.
As a result, we’d prefer to stick with the stocks that continue to trend well and offer a reward/risk that’s skewed in our favor.Lost Password?