Cyclicals to rule the roost

Last Updated: Mon, Dec 10, 2012 03:52 hrs

pDid your portfolio outperform the Nifty in the run-up of the last few months Unfortunately for most investors the response is likely to be subduedppAnalysis 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 lagppComing 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&rsquos an opportune time to look at these stocks Hence cyclical sectors are likely to rule the roost if the rally continuesppAdopting 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&rsquos a prisoner&rsquos dilemma for global fund managers where they are only left with the choice of investing sizeable proportion of funds in India for achieving portfolio outperformanceppTechnical 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 5950 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 5500ppSo 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 5950 Surpassing this level means there are no further pit stops before its all-time high of 6347 made on January 10 2008 In the event of such a breakout it&rsquos a clear &lsquochoice&rsquo and not &lsquochance&rsquo that will have &lsquocyclicals&rsquo as the answer to the question &ldquoBuy what&rdquohr pp alignrightemThe author is head technical equities & associate vice-president Motilal Oswal Securitiesemp

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