Did your portfolio outperform the Nifty in the run-up of the last few months? Unfortunately, for most investors, the response is likely to be subdued.
Analysis of historical data reveals that any fresh rally in the market leads to the emergence of new sectors. Money supply is a given and the rally in one asset class comes at the cost of another asset class. Behavioural finance investors have tools to identify momentum and adjust portfolios accordingly. Sadly for the regular investor, a reshuffle of portfolio happens with considerable time lag.
Coming to our market, in the past few months we have seen defensives like pharmaceuticals and fast-moving consumer goods were unable to outperform the benchmark. However, cyclicals like automobile, realty, infrastructure and banks are advancing with increased momentum. A relative strength analysis suggests it’s an opportune time to look at these stocks. Hence, cyclical sectors are likely to rule the roost if the rally continues.
Adopting a top-down approach, we see the Global VIX has been quoting at the lower extreme, indicating low correlation among inter-market indicators. The Nifty has been less correlated to the movements of global equity markets, of commodities, as well as bond yields and currencies. A prolonged phase of such decoupling could be nearing an ending as the inter-market set-up is entering a mature stage. Subsequently, the diversification benefits of emerging equities could vanish and the call for profit booking is likely to emerge stronger. The correlation model might get a trigger in a few months but till the Global VIX does not move above 20, funds flow could remain positive for Indian equities. A relative strength analysis of all global equity markets shows India placed in the leading space. It’s a prisoner’s dilemma for global fund managers, where they are only left with the choice of investing sizeable proportion of funds in India for achieving portfolio outperformance.
Technical analysis is a game of probability and comes with conditions. Hence, any outlook cannot be charted without conditional triggers. A wave analysis on a standalone chart of Nifty suggests an important resistance at 5,950. The moves of the last few days have led to the development of a Bearish Hanging Man candlestick pattern and a Bearish Belt Hold Line on the daily chart (formed on December 6 and 7, respectively), affirming our levels of headwinds. This development has raised the significance of the level indicating the rally might end and a severe sell-off could ensue taking the index towards 5,500.
So, the strategy for now should be to exit longs and wait till we get a confirmation to technical cues. We recommend investors to take long positions only if the Nifty negates the stated pessimistic pattern and sustains a close above 5,950. Surpassing this level means there are no further pit stops before its all-time high of 6,347, made on January 10, 2008. In the event of such a breakout, it’s a clear ‘choice’ and not ‘chance’ that will have ‘cyclicals’ as the answer to the question, “Buy what?”.
The author is head, technical equities & associate vice-president, Motilal Oswal Securities