Technical Strategy for May 2023: Buy dips in May; don't shy away

Nifty: Falling channel breakout confirms resumption of up trend

Technical Outlook

• The Nifty staged a decent recovery from the oversold territory that helped the index to resolve above four month’s falling channel and faster retracement in smaller degree indicating conclusion of corrective bias, which, in turn, suggests  resumption of primary up trend.
• We expect the index to continue its ongoing upward momentum and gradually head towards next milestone of 18,300-18,500 as it is high of January 2023 coincided with 80% retracement of Dec-Mar decline (18,887-16,828). Thus, dips should be capitalised on to accumulate quality stocks.
• In the process, we do not foresee the index breaching the key support threshold of 17,200 as it is confluence of:

               a) 61.8% retracement of March-April rally 16,828-17,863, at 17,224

               b) positive gap recorded on March 31, 2023 is placed in the range of 17,126-17,204

Sentiment indicator maintains rhythm

May volatility=opportunity for investors

Seasonality favours buying in May.

May has typically provided cyclical lows for index.

There is a old adage in overseas markets, “Sell in May and go away” which is based on assumption that stocks typically underperform during May-October period.

We have closely examined the performance of NSE Nifty index over past twenty years to verify, if this adage holds true in Indian context. Empirical evidence suggest that in fact May has offered a decent buying opportunity for investors as in 83% of the times year-end returns as calculated from May lows has been positive.

The adjacent table lists, May lows every year for the Nifty and year-end returns as calculated from May lows.

To conclude, seasonality clearly favours buying in May. Investors would be therefore be better off utilising volatility, if any, during month of May to their advantage and build quality portfolios.

Table showing year-end returns of Nifty from May lows every year

                                          

Bank Nifty: Outperformance to continue, retesting of all-time high likely

Technical Outlook

• The Bank Nifty gained for a second consecutive month and continued to outperform the Nifty. The index, in the process, retraced almost 80% of entire December 2022-March 2023 decline (44,151-38,613). It witnessed a sharp up move of 9% in just four weeks, which led to weekly stochastic approaching overbought territory with a reading of 94. Hence, a couple of weeks of breather cannot be ruled out, which should not be seen as negative. Instead, it will make overall trend healthy.
• Overall price structure remains positive. We expect the index to eventually resolve above the hurdle area of 43,000-43,200 and gradually head towards the all-time high of 44,150 in coming months. However, we expect the up move to happen in a non-linear manner while bouts of volatility cannot be ruled out. Dips should be used as buying opportunity.
• Key point to highlight is that the index has recently for the first time since December 2022 posted a faster retracement of last major declining segment i.e. seven week’s decline (42,015-38,613) retraced in just three weeks signalling strength.

Small Cap index: Breakout above a falling channel leads to acceleration of up move

Sectors in focus: BFSI, PSU, Capital Goods, IT & consumption

Outlook

• Banking stocks were major outperformers last month and are currently placed at outperformance quadrant, with improvement in relative and momentum terms. We expect banking stocks to continue their outperformance.
• Capital goods and PSU stocks continued to outperform and remain in the outperformance quadrant.  PSE Index is currently placed at an all-time high with improvement in both relative and momentum terms. PSU and capital goods are expected to extend the outperformance.
• IT stocks, after the recent sharp correction, are placed at key support, offering a fresh entry opportunity with favourable risk reward set up. In our Relative strength model, it is also placed at Bargain Buy quadrant.
• Auto & pharma stocks are expected to witness stock specific action and perform at par with the market.
• Metals Index is currently placed at the neutral quadrant and is likely to underperform the benchmark index in the coming month.

Sectoral indices – Relative to benchmarks

Relative Strength Comparative: Evaluating underlying strength

• To closely gauge the underlying strength in respective sectors vis-à-vis the benchmark, we analyse the Relative Strength Comparative (RSC) indicator. As the name suggests, it is a comparative measure of strength vis-à-vis a benchmark or a sector.
• While the RSC line is rising, the sector is outperforming the general market i.e. it is either rising faster than the benchmark in an up trending market or going down less, in a down trending market or even rising. While the RSC line is falling, the sector is underperforming the broad equity market. If the market is going up, the sector is going up less or may be even going down. If the market is going down when the RSC line is falling, the sector is going down more than the market. A flat RSC line indicates in line market performance going up or down by the same magnitude.
• The purpose of this exercise is to identify those sectors that are outperforming and avoid sectors that are underperforming.

 

Technical Outlook – Pharma & Chemicals

• Pharma, healthcare and chemical stocks came under the limelight as buying demand emerged amid oversold readings on expected lines.
• Pharma and chemicals stocks have undergone significant price/time correction over past 18 months. We expect the sector to garner further traction and head upwards from here as risk-reward is favourable.
• Technically, Sun Pharma, Dr Reddy’s, Alkem, Torrent Pharma, Abbott,  Gujarat Fluorochem, Granules India, SRF, Navin Fluorine, Coromandel International look better.

 

 

Technical Outlook - Consumption

• The  consumption sector is seen gaining traction as both FMCG and discretionary stocks are attracting buying demand at oversold trajectory.
• Most stocks across FMCG and discretionary are oversold and poised for a technical pullback. In relative terms, we expect the sector to perform in tandem with benchmarks.
• Technically, ITC, Asian Paints, Titan, Tata Consumer, Astral, Bector Foods look better placed.

 

 

Technical Outlook – IT

• The IT index underperformed as the index came under pressure amid earnings disappointment.
• The sector is currently oversold ahead of US FOMC meeting. However, we expect the sector to undergo base formation while technical pullbacks from oversold readings cannot be ruled out.
• We like Reliance Industries, TCS, Persistent, Newgen Software from a risk-reward perspective.

 

 

Technical Outlook- Capital goods

• The capital goods sector extended its relative outperformance and led the market recovery.
• We  expect the sector to continue its outperformance. While heavyweight large caps may consolidate after the recent run up, we expect focus to remain on midcap stocks.
• Within the space, through charts, we prefer L&T, ABB, AIA Engineering, Voltamp, Carborandum Universal, KEC, BEL, Mazgaon Dock, Engineers India, TRIL, NRB Bearing.

 

 

Technical Outlook – Oil & Gas

• The oil & gas space extended its decline led by heavyweights like Reliance Industries while gas distribution companies and upstream companies were resilient.
• Going forward, relative underperformance is expected to bottom out in coming months and the sector to stage a technical pullback.
• Stocks like Reliance Industries, ONGC, IGL provide a favourable risk reward.

 

 

Technical Outlook - Metal

• The metal index extended its decline amid concerns over a slowdown.
• In relative terms, the index ratio with benchmark is poised at a key hurdle and indicates relative underperformance with stock specific performances. Many stocks in the sector are oversold and a technical pullback is likely.
• Technically, Hindalco, Tata Steel, HEG are preferred.

 

 

Technical Outlook - Auto

• The Auto Index bounced back along with the index and is expected to gradually head towards higher band of consolidation from oversold readings.
• In relative terms, ratio line is consolidating post breakout from multi year base formation. We expect sector to perform in line with benchmarks and provide favourable risk-reward.
• Technically, Maruti Suzuki, Tata Motors, Eicher Motors, Bosch, Mahindra CIE, Apollo Tyres, UnoMinda, Mayur Uniquoters are looking good on price charts.

 

 

Technical Outlook – Realty & Infra

• The real estate sector bounced back from oversold readings as it has been underperforming over past 18 months. Signs of interest rates peaking out helped the sector to stage bounce back.
• In relative terms, the ratio is in downtrend. We expect the realty sector to gain upward momentum in a gradual manner. Infra stocks, on the other hand are expected to relatively perform better.
• Within the infra space we like UltraTech Cement, JK Lakshmi Cement, DLF, Brigade Enterprises, HG Infra, Ashiana Housing  has been resilient.

 

Source: ICICIdirect Research, Bloomberg, BSE, Spidersoftware