Update for the week ending 20th June 2014.

In this weekly blog we take a look as to which sectors of the Indian market are likely to perform better vs. the benchmark Nifty index over the medium to long term by analysing the relative strength of a sector-specific index.

Relative strength (RS) measures the relationship between two assets. An RS line is calculated by dividing the price of one asset or index by another. A rising RS line means that the numerator is outperforming the denominator i.e. the numerator will gain more than the denominator or it will fall less than the denominator.

For example – when examining the CNX mid cap index, the RS line is calculated by dividing the value of the CNX mid cap index by the Nifty index to get the RS value. A rising RS line means that the numerator which is the Mid Cap index will rise faster than the denominator i.e. the Nifty index. Or in a down market it will fall less than the denominator.

Update for the week ending – 20^th June 2014.

Nifty Weekly Technicals:

The Nifty ended the week in the red by 0.41% with buying support coming in at 7500 levels. The primary trend remains up as the index is sitting firmly above its 10 and 40 week moving averages. A retracement close to the 10 week MA cannot be ruled out. The 14 week RSI of around 75 is in the overbought zone, and the MACD and its signal line are also at 4 year highs – this does not necessarily mean that a big correction is coming, rather the index could see a bit of a consolidation after the extended move over the previous weeks, which is also supported by the hedged long positions of FII’s in the index futures market. For the short to medium term the index has support placed just below 7000 while the long term trend would turn negative below 6400 as that was the prior resistance. 

CNX MIDCAP Index: The Mid Cap index is in the outperform mode as per our signal description table above.  In the short to medium term a retracement close to the 10 week MA around 9800 cannot be ruled out. Over the long term the trend in Mid Cap stocks looks to be positive as long as the index trades above the 9600 zone. Also, outperformance relative to the Nifty index will continue as long as the RS line trades above its 40 week MA.

CNX Small Cap Index: The index ended the week flat and looks likely to correct to the 2010 highs of around 4600 levels which should act as supports. Over the long term the trend in Small Cap stocks looks to be positive as long as the index trades above the 4600 zone. Also, outperformance relative to the Nifty index will continue as long as the RS line trades above its 40 week MA. A rising 40 week MA on both the charts is supportive of this case.

CNX Auto: The Auto Index is in the outperform mode as per our signal description table above. However, the flattening RS line could be an indication that the auto index could perform sluggishly vs. the Nifty going forward.

CNX Bank Nifty: The index is trading above its 2010 and 2013 highs around 13,000 which should act as supports on any major decline. Over the long term the trend in Banking stocks looks to be positive as long as the index trades above 13,000. Outperformance relative to the Nifty looks doubtful in the short term as the RS line may test its 40 week MA.

CNX Pharma: The Pharma Index is in the Positive/Neutral mode as per our signal description table above. The index is above its 40 week MA but going forward the RS line indicates severe underperformance vs the Nifty index and a shift from this defensive space to other stocks/ sectors.

CNX IT: The IT Index bounced back this week as the Rupee depreciated. However, the down trending RS line indicates severe underperformance over the long term while the slope of 40 week MA also has turned down.

CNX FMCG: The FMCG Index is in the Positive/Neutral mode as per our signal description table above. The index is trading above its 40 week MA. But going forward the RS line indicates severe underperformance vs the Nifty index and a shift from this defensive space to cyclical stocks/ sectors.

CNX Metal: The Metal Index was unable to sustain above its February 2012 highs and looks set to test the Jan 2013 highs and the 10 week MA of around 2900 levels in the coming weeks. Overall, the break of a 4 year downtrend on the index as well as its RS line along with a rising 40 week MA looks positive over the long term.

CNX Infra: The RS line of the Infra index has broken a downward trend after 6 long years and is sustaining well above its 40 week MA for the first time since the financial crisis. This augurs well for the outperformance of this sector.  

CNX Energy: The Energy Index failed to hold above its 2010 highs and the RS line seems to be testing its 40 week MA. A close of the RS line below its 40 week MA is a risk to further outperformance.

CNX Realty: The Realty Index is in the outperform mode as per our signal description table above. The index could face resistance around 310 which is the 2013 high. Over the long term the trend in Real Estate stocks looks to be positive as long as the index trades above its 40 week MA. Also, outperformance relative to the Nifty index will continue as long as the RS line trades above its 40 week MA.