»Profit Hunter by Equitymaster

On This Day - 8 MAY 2020
The Next Sector to Outperform is Probably Not the One You're Bullish on Now

Apurva Sheth, Editor,Profit Hunter Pro

Covid-19 crisis has taken a toll on several businesses and economies across the world. The Indian stock market too has paid the price for it.

You might paint everything with the same brush if you don't have an eye for detail. All companies aren't suffering from the crisis. Some are doing well.

You can watch my video on the companies which are least affected, or even benefitting from, Coronavirus here.

On the other hand, there are some companies and sectors which are doing worse than others. Take banks for example.

The benchmark NSE Nifty is down about 24% this year. But the Bank Nifty, which tracks some of India's biggest listed banks, is down about 39%.

2020 Performance of Bank Nifty and NSE Nifty

 

Nifty and Bank Nifty were moving in tandem until markets bottomed out on 23 March. The Bank Nifty has underperformed Nifty since then and continues to lag.

On 28 April, RBI Governor Shaktikanta Das reduced reverse repo rates to 3.75% from 4%. This was just one among several measures to pump liquidity in to the financial system.

Now it remains to be seen whether these liquidity measures help support economic growth. But it hasn't helped to lift sentiments in banking stocks which are still struggling because of the lockdown.

{inlineads1}

However, I believe all this could change soon. Have a look at this chart now...

Ratio Chart of Bank Nifty to Nifty

 

This is a ratio chart of Bank Nifty to Nifty. Here I have divided the closing prices of Bank Nifty by the closing prices of the Nifty. It shows how Bank Nifty is performing relative to Nifty.

A rising ratio line means Bank Nifty is outperforming Nifty. A falling ratio line means it is underperforming.

It is important to remember that a rising ratio line does not necessarily mean that Bank Nifty is rising and Nifty is falling. It simply means, Bank Nifty is outperforming Nifty. This could also mean that both are falling but Bank Nifty is falling less than Nifty.

{inlineads2}

You will notice in the above chart, Bank Nifty was outperforming Nifty since 2013. It held up above the rising red trendline for almost seven years.

Bank Nifty breached this trendline and dropped like a rock in February 2020. Its underperforming Nifty by a wide margin over the last few days.

However, the ratio chart of Bank Nifty to Nifty is reaching long term support levels now. The horizontal green line in the chart above acted as resistance in 2011, 2013, and 2014.

Old resistances often act as supports. The probability of Bank Nifty outperforming Nifty is high. Smart traders can make the best use of such opportunities with pair trades.

You can read how one could have generated gains of Rs 59,250 with pair trading in 10 days here.

Warm regards,


Apurva Sheth
Senior Research Analyst, Fast Profits Report
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Find out about the most exciting tech stock of 2020 here.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407