Most of the Equally-Weighted Sector Indexes we track have been underperforming their Cap-Weighted counterparts for the last 16 months, however, we are starting to see some signs that a counter-trend rally in three sectors may be brewing.
Here’s the ratio of the Equally-Weighted vs Cap-Weighted Nifty Commodities Index putting in a lower low in price as momentum puts in a higher low. With prices extended from their 200-day moving average, this suggests there’s room for mean reversion to the upside.
Click on chart to enlarge view.
We’re seeing something similar in the Nifty Infrastructure Index, which held its year-to-date lows as momentum diverges. Given the overlap between these two indexes, this is not a surprise.
We’re seeing similar action in the Nifty IT Index, which also held its year-to-date lows and is bouncing as momentum diverges.
Mean reversion in these ratios suggests the upside participation in these sectors is going to broaden over the short/intermediate-term. As a result, we want to be looking to individual stocks within them for opportunities on the long side, particularly those that have a smaller weighting in the index.
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