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Every quarter, Infosys starts the results season and the information technology (IT) company’s results, forecast and investor reactions evoked by those results tend to set a trend for the sector. Infosys is not the biggest Indian IT company nor the fastest growing. But it does have a widely-distributed investor base and, by far, the highest free-float market cap in the sector.
A strategy that has worked quite well for a trader is to wait till Infosys declares quarterly results and a trend develops in the stock. At that stage, take positions in the same direction in HCL Tech, TCS, Wipro, etc, in fact, in every IT stock in the derivatives segment. Then, the trader can hold each of those positions till the respective company results are declared and then book profits. The strategy also involves a move onto smaller and mid-sized IT stocks if the trend is positive. The smaller stocks can provide sharper upsides. In a downturn, however, avoid the smaller fry absolutely. They are unlikely to do well when the majors do badly, and shorting outside the futures and options (F&O) segment is more or less impossible.
Is this strategy worth implementing this time as well? It should be worth it since the other stocks have also responded positively to Infosys' uptrend. Of the 20 stocks in the CNXIT sector index, 13 are within touching distance of their 52-week highs. However, CMC has just declared poor results and dropped a huge amount. Mindtree has also seen a big sell-off.
One retarding factor for a bull run in the IT sector could be rupee strength. This is why the CNXIT is often counter-cylical. The Indian stock market tends to go up when FIIs are buying heavily. If FIIs are buying heavily, the dollar is often down.
Another retarding factor could be differences in the results and guidances of other IT majors since each individual company is liable to deliver results that differ somewhat from the others’. In the past several quarters, however, TCS and HCL Tech have consistently beaten expectations. Other stocks have had a more hit-and-miss record. But the ‘buy on rumour and sell on news’ formula has returned positive short-term gains on balance.
Looking at the individual constituents of the CNXIT index, Financial Technologies has been an under-performer. Core Education has been a big loser over a year. Oracle and Mphasis have poor returns as well. The rest have double-digit performances and most have comfortably beaten the Nifty. Financial Technologies and Core Education had excellent returns the last month.
Any trader implementing this sort of a broad-based shotgun strategy has to set disciplined stop-losses.
This targets big trending upmoves. The stops need to be fairly wide to take account of the inevitable volatility at quarterly results. The trader could set a rigid five per cent stop-loss or a loss limit at thrice the average daily volatility of the past 20 sessions.
The author is a technical and equity analyst
