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A Study In Red – Looking For Relative Strength In The Market

A Study in Red – Looking for Relative Strength in the market

Red has been the dominant colour in the markets in the past one month, we have seen a wide sell off , markets have fallen mercilessly and taken down all stocks with it without discriminating between the good , bad and the ugly. It did not matter what the fundamentals were or the technical were, the Cornovirus crash took down the market as a whole. In such times, for an investor what matters is to look at those pockets in the market that have fallen the least and find the sector leaders. Thru this relative strength analysis of the market we will try to identify these sectors and pockets of the market.

 Sector rotation is dominant theme in our markets as portfolios have been significantly re-balanced by institutional investors post the decline and a relative strength study can help give us an idea as to how the money has been flowing to stocks from a particular sector and a market as a whole.  Secondly, out performance in a given direction tends to continue for some time, so if a stock in a sector is leading it will tend to continue to remain the leader for a while and similarly the ones that is falling the least will continue to be the stock that is facing the least damage for a significant amount of time.

The reason for this is momentum, stocks that are leading have inherent traces of momentum that are working for them, these stocks have a stronger reason to rise compared to the others and hence the momentum in the market has entered these stocks and they will continue to be ahead because momentum is supporting their rise , similarly to the stocks that have fallen the least the upside momentum that was prevailing has managed to arrest the decline

This gives both traders and investors a good birds eye view of how stocks in various sectors will behave and can be easily incorporated in a trading or investing plan.

We considered the NSE500 universe and performed this analysis from the beginning of the calendar year – which will appear to be more for the shorter term but considers various cycles that are in play in the market owing to the series of events that have happened in the past month.

We were startled to discover that only 22 our of 500 companies are actually showing positive Calendar Year(CYTD) to date returns.

In the below chart you can find the CYTD performance of the NSE 500 universe- slotted by returns

Source: NeoTrader – https://trade.chartadvise.com/ 

In this chart the deep reds indicate a fall of more than -16% from the beginning of the year, we can find that from 16 sectors almost 8 sectors have nearly 100% of all components trading in the deep red mark while the balance 6 sectors show that 90%+ of the components are in deep red.

Only two sectors ie Pharma and chemicals are showing some signs of green.

I have used our software NeoTrader to do this analysis because it offers a very easy- to- use colour coded layout which helps me get a snapshot in one glance  saving time. But, if you are highly proficient in excel, you can download the data from various sources into a spread sheet  and also perform a similar analysis by adding complex formulas and crunching thru the numbers.  

Now we will dig deeper into the two sectors that showed some green.

Pharma – Upside momentum still visible  

Given below is the CYTD performance of All Pharma companies

Source: NeoTrader – https://trade.chartadvise.com/

These are a list of stocks that are still in the postive on YTD basis even after the large sell off

Top Performers (YTD Returns in %)

  1. Ajanta pharma:+35%
  2. IPCA Labs: +21.4%
  3. Abbott India: +21%
  4. Granules: +14.2%
  5. Torrent Pharma: + 13.2%
  6. ALKEM: +13%
  7. DRREDDY: 9.5%
  8. CADILAHC: +7.7%
  9. JBCPPHERM: +7%
  10. DIVISLAB: +3%

Chemicals – Some Green-shoots still surviving

Source: NeoTrader – https://trade.chartadvise.com/

The chemical space was the darling of investors in 2018 and 2019 but most stocks have given up their gains of the last two years and many of them have actually slipped into deep red. But three stocks stand out and are still indicating that the uptrend is not extinguished

 Top Performers (YTD Returns in %)

  1. Navin Fluorine: +26%
  2. BASF: +10%
  3. Deepak Nitrite: +2%

FMCG – Not as bullish as we think it is

Source: NeoTrader – https://trade.chartadvise.com/

Many believed that the FMCG pack will survive the downfall and stay true its defensive nature but strangely only a handful of stocks are in the green and the leader being JCHAC is not one of the usual suspects.

  Top Performers (YTD Returns in %)

  1. JCHAC: +15%
  2. HUL: +12%
  3. AMBER: +7%
  4. AKZO INDIA: +4%
  5. NESTLE: +2%

Some honorable mentions in other sectors

Apart from these sectors mentioned above all others sectors are in the red and almost all stocks in those sectors are showing negative returns. I have identified some standout performers that have not slipped into the red like their sector counterparts. Most of these had some recent new developments that has helped the survive the fall.  

  • India Cement: +42% YTD –it is the sole stock in the cement pack that is having positive return. But it is far from being the bluest of chips in the Cement sector and the news of RK Damani buying into the stock is responsible for this inclusion.
  • MIDHANI: +10% –Considering all the news around divestment could be a reason why this stock made it.
  • Suzlon: +13.5%  –This is a penny stock and I wouldn’t give too much weight to the percentage change on such a low base.
  • Indostar Capital:+40% – The news around Brookfield investing up-to 1000cr into this company is why I would think this stock managed to buck the trend.

The fact that only 22 out of 500 stocks are in the green shows that the damage is unprecedented. Thru this study we only tried to identify those pockets that are still in the green and not completely damaged and identify the leaders of the race. More detailed research would be required to ascertain whether they qualify to be investment candidates. In our fund management vertical Plus Delta Portfolios and also on our exclusive advisory channel “Markets with Dr CK Narayan” – we are busy doing this work and trying to identify the stocks that have the potential to move higher post this fall.

Regards,

Aditya Iyer
Fund Manager – Plus Delta Portfolios 

Co-Founder – NeoTrader

 PS: Now you can follow Aditya Iyer on Social Media and get updates on the critical issues affecting the markets and your finances.

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