Nifty stocks on uptrend but technicals point to a pause in the rally

Topics Nifty | Nifty stocks | BSE

A whopping 98% of stocks in India’s NSE Nifty 50 Index were trading above their 200-day moving average this week.
The equity rally in India has been so broad that almost every stock in the benchmark is in a technical uptrend. But if history offers a guide, that could point to an upcoming pause.

A whopping 98% of stocks in India’s NSE Nifty 50 Index were trading above their 200-day moving average this week, a level used by technical analysts to determine whether a stock is in an uptrend. The last time India posted such an extreme reading was in July 2014, which was followed by a correction in September that lasted longer than a month.

India's Nifty 50 Index has 98% of stocks trading above 200-day moving average.

Extended breadth is not the only signal that India’s equity rebound may have run too far too fast. The Nifty’s 11% gain in November pushed it more than two standard deviations above its 50-day moving average, and the gauge’s 14-day relative strength index is also in so-called overbought territory.

“There could be a short-term correction in the Nifty, but a milder one,” said Sameer Kalra, a strategist at Mumbai-based Target Investing. “Stocks which were outperforming have stabilized for a while now.”

Kalra said investors should turn their focus to medium-sized companies instead of the larger stocks found in the Nifty 50.

“I think for the next couple of weeks at least, until the month end, midcaps might outperform the Nifty by a huge margin,” he said. “If the catchup rally is to be broad-based, midcaps are where the laggards are the highest in number.”

Still, even if technical indicators look overextended, the country’s fundamentals seem to be on track.

A gauge of India’s recovery created by Jefferies Financial Group Inc. climbed again in November, a move seen as “encouraging” given the decline in government expenditure, according to a note Tuesday. Analysts Mahesh Nandurkar and Abhinav Sinha said the rebound looks to be on track and maintained their overweight position on banks and property stocks.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel