The Financial Services, Energy, IT, and Consumer Goods sectors remain the leaders, while smaller sectors like Pharma and Media continue to lag the broader market. Our chart of the week is sticking with that theme by looking at the Nifty Metals and Nifty Infrastructure indexes, which collectively represent roughly 9% of the Nifty 500. Although these sectors have been consolidating near all-time highs for most of this year, recent developments suggest they may be vulnerable to further downside.
Last week the Nifty Infrastructure index broke below its 2014-2015 highs to confirm a failed breakout and put sellers back in control. The Nifty Metals index has yet to break down, but appears to be forming a “head & shoulders” topping pattern, which would confirm with a break below the neckline which happens to coincide with its 2014 highs.
As we can see from the chart above, these two sectors tend to move in tandem with one another. Whether you’re looking at the rolling 1-year correlation calculation or taking the visual approach of seeing them both bottoming in mid-2013, topping in mid-2014, and bottoming together in early 2016, the strong positive correlation is clear.
If this relationship remains intact, the Nifty Metals index should follow Infrastructure stocks lower and confirm a failed breakout of its own. Unless the Nifty Infrastructure index can get back above its 2014 highs, this looks like an opportunity to look at the short side of these sectors’ weakest components. And if taking short positions isn’t for you, avoiding these sectors on the long side may help save you a lot of potential headaches.
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