Sensex ready for reversal

Our early year January outlook suggested a 30 per cent fall from 2010 highs was possible. We also mentioned that any bull market in time should start from the second quarter of 2011. We maintain the view and continue to anticipate a June 2011 bottoming and another 15 per cent fall on the Sensex is still likely.

We can break the market view sectorally. The current up move of NSE’s Bank Nifty index should complete before 12,000 levels, after which the next down leg should begin. From a performance-ranking perspective, most of the Indian banks have high rankings. Ten out of 15 banks are ranked above 80 per cent, eight of 15 are ranked above 90 per cent, 14 of 15 are above 50 per cent.

The Orpheus numeric ranking system is based on absolute performance. We allocate the percentile based on the performance of a group of 1,000 global assets. If a stock is at the top of the list, it gets a 100 per cent rank and vice versa. According to performance cycles, the best underperform and the worst outperform. So, we are looking to reduce or short the best rankers and long or accumulate the worst rankers.

Punjab National Bank (PNB) is the best performer, followed by Bank of India, ICICI Bank and HDFC Bank. PNB is topping at 98 per cent ranking, while the Jiseki cycles continue to point lower. The BankNifty performance cycles are also negative. The index is placed higher at 60 per cent ranking. Indian Overseas Bank is the worst and the only bank ranked below 50 per cent.

We won’t give the anticipated reversal on the banking sector for more than a few trading days. PNB, Bank of India, ICICI Bank, HDFC Bank, Bank of Baroda and Canara Bank are potential shorts (after price confirmations). While Indian Overseas Bank, the worst ranked should outperform the rest of the banking stocks.

Above this, we have the March seasonality, which has a good track record for Nifty. Since 2003, March always brought in a multi-week reversal. Any bounce back case should halt anytime before Nifty 5,800 levels. The current bounce from recent lows on Nifty is overlapping and countertrend in nature.

A good way to judge the market is also confirmation. If most stocks rise together, it’s a confirmation. When this does not happen, the non-consensus makes the up move doubtful. This is what seems to be happening, if one looks at Cummins, Lupin, Dr Reddy and a few other blue chips. Even ‘volatility’ after the up and down movement has just made a higher high and is still basing to move higher. The real breakout on Nifty VIX is still pending.

The author is CMT and Co-Founder, Orpheus CAPITALS, a global alternative research firm