More sectors turn bearish as downtrend continues

In June, we had written an article, ‘Bear hug tightens on Indian markets’, in which we had mentioned that quite a few sectors were turning bearish. Now, the number has increased. In June, the Sensex, Nifty and eight sectors were bearish, five neutral and one bullish. Now, we have the Sensex, Nifty and 12 sectors bearish, one neutral and one still bullish.

The neutral sector is healthcare and the bullish is FMCG. The sectors that turned bearish from neutral are consumer durables, Information technology (IT), metals, and oil & gas. The increased bearishness does not augur well for the market bulls or the economy. So far, the fall has been slow and steady, which is both good and bad. The good part is that there has been no panic-selling like in 2008. But, the bad part is that a market which falls slowly goes up slowly, too. However, if there is a global shock, the Indian markets may fall fast, as there is not much in the way of support on the charts of several sectors.

THE METHODOLOGY
To identify bullish and bearish sectors, we have used the methodology of dividing market trends into four stages, as espoused by the famous market technician and author Stan Weinstein. Over the long term, markets tend to move in four stages - market bottom, rally, market top and sell-off. Generally, markets tend to move sideways in the bottom and top phases, but sometimes they may not. For instance, in the March 2009 bottom, both Indian and US markets did not consolidate and rally, but made a ‘V’-shaped bottom and rallied strongly.
 

IN BEAR GRIP
Index	30-week SMA slope	Price to SMA	Status in Jun-11	Status in Nov 2011
Sensex	Down	Below	Bearish	Bearish
Nifty	Down	Below	Bearish	Bearish
Auto	Down	Above	Bearish	Bearish
Bank	Down	Below	Bearish	Bearish
Cons durables	Flattening	Below	Neutral	Bearish
FMCG	Up	Above	Bullish	Bullish
Health care	Down	Below	Neutral	Neutral
IT	Down	Above	Neutral	Bearish
Metal	Down	Below	Neutral	Bearish
Oil and gas	Down	Below	Neutral	Bearish
Power	Down	Below	Bearish	Bearish
PSU	Down	Below	Bearish	Bearish
Realty	Down	Below	Bearish	Bearish
Mid cap	Down	Below	Bearish	Bearish
Small cap	Down	Below	Bearish	Bearish
Capital goods	Down	Below	Bearish	Bearish

The charts clearly show the Sensex, Nifty and most sectors have moved well into fourth stage. This is not only shown by the price, but the 30-week simple moving average (SMA) too, which is a crucial tool used by investors to form a bullish or bearish bias, when trading the four stages.

TO FORM A BEARISH BIAS, THE MARKET HAS TO:

• Move sideways after a rally
• Fall below the lowest price-point in the sideways rally
• Trade below the 30-week SMA
• And, finally, the 30-week SMA must slope down
• The reverse is true to form a bullish bias.

BROAD MARKETS BEARISH
Both the Sensex and Nifty have been bearish for some time after peaking in November last year and exiting the third stage. The prices of both the broad market indices are below the 30-week SMA, which is sloping down. Interestingly, both charts are showing that the latter is now acting as a resistance. Each time the indices rally to their 30-week SMA, they sell off. The table below gives the status of the index and sectors in the Indian economy and provides links to the chart.

TRADING STRATEGY
With most sectors bearish, it's best to wait for rallies to short into. Prices rallying to the 30-week SMA are generally considered a nice place to short. However, one should also make sure the prices fell from that level earlier. The only sector to be bullish about is FMCG. However, given the strong bearish bias in most sectors, it's best to avoid it, as it too may turn bearish. Also, since it is still bullish, it's not advisable to short it. Since most of the sector indices are not traded on the futures market, one should look for bearish stocks within the sectors to short.

The author is based in Chicago and is the editor of www.capturetrends.com