Going forward with metals

As the Nifty is pushing higher to key resistances at 5,500, the daily RSI (relative strength index) continues to suggest an exhausting up-move. Most sector indices are showing topping structures as well. Our view on the Indian market remains up but topping and we are not looking higher than 5,500-5,600 levels at this stage.

Last time, we mentioned that metals was still the top potential out-performer, with three metal stocks: Sterlite, Tata Steel and Hindalco. Technology and metals were two of the top potential outperformers, according to the numeric ranking based on relative performance. As anticipated, metals started to outperform. It should be interesting to analyse how these two sectors’ performances are behaving now.

Performance cycles simplify the idea of sector rotation. They can not only be looked at independently, but also as pairs. Here we are talking about the performance cycle (Reiki) between CNXIT and BSEMETALS. Both show bottoming structures against INR. However, as we see on the first chart illustrated here, the CNXIT – BSEMETALS performance cycles suggest that metals should outperform more than technology. Despite CNXIT getting more news attention, metals were the true leading sector on performance. The numeric ranking filter continues to suggest Hindalco as the best buy.

This is also in sync with our view on metals’ stocks, which started to outperform as anticipated. The top three potential ones — Tata Steel, Sterlite and Hindalco — continued to push higher from low rankings. Our view on the Indian metals sector is confirmed by the global view on metals. Globally, metals is bottoming as an asset class, as is energy. The topping asset classes are agro and bonds. Forex is topping against the dollar and suggests that dollar outperformance could also be in.

Getting back to the Indian market, the top potential underperformer sectors are consumer durables, auto and capital goods. At the bottom we have Nifty Vix, metals and BSEOIL. The Indian Volatility Index is now a top potential outperformer, which means we expect high volatility in the quarter ahead. This is in sync with our view on global markets and rising global volatility. We also mentioned in our global alpha review that there are assets that will fall more and faster than Dow. The Indian Sensex is one of these. Performance cycles suggest the Sensex should underperform Dow. We are getting ready for short Sensex–long Dow.

We added five new pairs to our pair tracker: Nifty–Ranbaxy, M&M–Jaiprakash, Nifty–Jaiprakash, Nifty–Suzlon and Nifty–ACC. Ranbaxy, Jaiprakash, Suzlon and ACC are potential outperformers (at low rankings) and should outperform not just the rupee (absolute performance), but also the broad market (Nifty). M&M is one of the top potential underperformers and should underperform Jaiprakash in the weeks ahead. We are also expecting new entry signals on the Nifty–ONGC, Nifty –Reliance Communications, Nifty–L&T and Nifty–Suzlon pairs.

The early economic performance cycles are still positive, but are heading to a performance top. This means financials and technology could have further upside left, but any positivity now should be marginal. Once markets top and performance cycles turn, the early economic sector should lead the way down. The respective sector’s current outperformance can be easily seen in our long only–short only perspective. The top winners of the sector are SBI and ICICI Bank with 10 per cent gains, TCS with nine per cent gains and NSEBANK with seven per cent.

With contributions from Mukul Pal