Oil, healthcare likely to outperform

Four weeks ago, we had talked about BSE Metals as the top potential outperformer. The BSE Metals has moved up from the worst numeric relative rankings among 12 to nine. Since these relative rankings are benchmarked to the Indian rupee, the sector delivered absolute gains because the rupee remained stagnant over the last few weeks. We can clearly see BSE Metals outperforming and retesting previous minor highs at 15,900 levels.

Understanding this benchmarking with the rupee may seem tough to digest. But simply speaking, whenever you buy a stock, you are allocating money out of rupee into the stock. So, you are actually – in a way – going short on rupee and long on stock. It is just looking at things relatively. Whether we look at it as a long-short strategy or not, buying Indian stocks means long stock-short rupee — it is the allocation per leg that differs.

Now that BSE Metals started to push higher in rankings against the rupee, we decided to analyse the case of Hindalco, as it is the metal stock which retraced the most (94 per cent) of the previous minor leg down (12 April to 9 June). Since the benchmarking is against the rupee, the strategy is to short the rupee (XEN) index traded on the London Stock Exchange and buy Hindalco on the local stock exchange. The strategy delivered 10 per cent from 2 August with a maximum return of 12 per cent.

Performance cycles are still positive and suggest an ongoing outperformance of Hindalco with potential upside till Rs 189. From an Elliott wave perspective, a marginal new high above Rs 189 would suggest an extending impulse up. Till Rs 189 breaks up, we are looking at the current formation as a completing corrective a-b-c up and an up but topping formation. At this stage we are not looking above Rs 189 for Hindalco.Our minor view on the Indian market is up but topping, now that Nifty has broken previous minor highs. However, we are not looking higher than the previously mentioned resistances at 5,600 levels. The large divergence between Nifty and VIX continues to suggest exhaustion and distribution.

Idea Cellular and Nifty VIX remain at the two extremes of the numeric ranking. The sector ranking continues to suggest consumer durables and banks as the best sectors to sell (underperformers) and BSE Oil and Healthcare as the best sectors to buy (outperformers). Nifty’s performance cycle is still topping and suggests a potential underperformance of the blue chips and the broad market in the coming weeks.

The pair tracker carries two fresh signals on the Cairn India-Maruti and Nifty-Suzlon pairs. The long only-short only tracker carries seven positive and six negative signals. The numeric ranking filter suggests IDFC as the best buy (top performer) and Reliance Communications as the best sell (top underperformer). The top winner remains SBI with 19 per cent gains.

The author is employed with Orpheus CAPITALS, a global alternative research firm