Beat market volatility by betting on the right sector at the right time

This week did end on high spirits but the broader sentiment continues to be directionless as retail investors and FIIs turned prudent over better asset class opportunities other than equities in India and globally.

This cautiousness is not new to D-Street and markets have been more or less tepid since the beginning of November. However, Nifty Realty and Nifty Auto have climbed almost 5 per cent and 2.5 per cent, respectively in the same short span of time.

Sector-specific outperformance as compared to Nifty50 has been a repeated phenomenon in the markets. For instance, during the Indian housing boom between 2003 and 2007, Nifty Realty delivered over 71 per cent returns in 2007 as against 53 per cent gains by Nifty 50. In the course of the dot-com bubble, Nifty IT gave astounding returns of over 490 per cent versus Nifty’s 66 per cent in 1999.

According to Peter Lynch, “If you are in the right sector at the right time, you can make a lot of money very fast”. Time and again due to the impact of economic cycles, some sectors tend to perform comparatively well and thus are capable of beating the market returns. This occurrence is not restricted to longer time frames. In fact, sector rotation has been taking place in our markets this year as well.

The relentless rally in the benchmark indices has actually been powered by the divided participation of different sectors across various time periods. The Jan-March 2021 leg of the rally was majorly supported by Nifty Metal (22 per cent returns v/s Nifty’s 4.80 per cent) but the index turned out to be a laggard in July-September 2021 (7.7 per cent returns v/s Nifty’s 12.4 per cent). Similarly Nifty Pharma, which led April-June 2021 rally (15.6 per cent returns v/s Nifty’s 5.75 per cent), cracked in July-Sept 2021 (0.2 per cent returns v/s Nifty’s 12.4 per cent).

What seemed like a secular rally, when diagnosed, has been a sequential sectoral run-up and consolidation play. Therefore, positional investors in their quest to generate alpha, should observe such sectoral performances and position their bets accordingly.

Event of the week
US retail inflation jumped to 6.2 per cent, the highest in over three decades, which sent chills across the globe. The market is now recalibrating its expectations of the Fed’s response to the rising inflation as it appears to be biased towards being non-transitory. An anticipated higher quantum of tapering by the Fed may lead to emerging markets, including India, receiving reduced foreign investments.

FIIs have already been net sellers in the secondary markets this week. Also, since October, investors seem to be tilting their focus towards non-equity asset classes. According to AMFI, equity-oriented MFs saw declining net inflows whereas debt MFs witnessed net inflows as compared to an outflow in September, suggesting increasing allocation to non-equities.

Technical Outlook
Nifty50 ended the week on a positive note and formed a strong bullish candle in the last trading session. Throughout the week, the index continued to consolidate between its 20 and 50-DMA, with the 50-DMA emerging as key support. Bank Nifty, which otherwise was demonstrating weakness, also bounced back from its support at 38,400. As the benchmark is currently hovering around its immediate resistance of 18,120 and the market breadth continues to be indecisive, we suggest traders maintain a mildly bullish outlook while keeping a strict stop loss below 17,750. The next crucial resistance is placed at 18,350.


Expectations for the week
Given that most of the quarterly results and the festive mood are behind us, indices are expected to move sideways. As the markets across the world are trying to decode the implications of rising inflation, any intensive selling by FIIs may take Indian indices lower, unless the domestic players provide support.

Next week, D-Street will also see a slew of new IPOs listing and the sentiment surrounding listing gains continues to remain bullish. Amidst worsening inflation fears, investors are currently advised to use knee-jerk reactions to, at best, cherry-pick quality stocks in resilient sectors and invest in a staggered manner.

Nifty50 closed the week at 18,102.75, up by 1.04 per cent.

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