Current bull market rewarding stocks that are outperforming: Yes Securities

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It is unlikely to be a one-way move on the upside this year, speed bumps along the way are going to make the ride bumpy for market participants said Pritesh Mehta of Yes Securities

This bull market is rewarding the stocks which are outperforming. Post the leg of an upmove driven by largecaps, eventually, midcaps would start participating, waking up from their deep slumber, Pritesh Mehta, Senior Vice President – Research, YES Securities (India) Limited, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q: Last week Sensex hit 40,000 and Nifty climbed 12000. Can we say that indices have made an intermediate top at these levels?

A: I won’t use the terminology of an immediate top or short-term top as the index could begin a process of consolidation between 11,600-12,100 or retrace back to the previous breakout zone (11,600) as the long-term uptrend continues to remain intact.

Analyzing Nifty 50 P&F (100*3) chart, the index has sustained above the objective trendline drawn from January low 2016. Despite the comeback of volatility in the month of May, the index is currently trading above its 15-DMA.

Even the 45-degree trendline marked from October low also has been trending higher. The pattern re-test around 11,100 contributed to recent reversal.

The current set up shows that the index is attempting a double-top breakout and the cluster of the vertical count is in the range of 12,700-13,000. We expect the index to resume the trend on the upside after consolidation between 11,600 and 12,100.

Q: Both Small & Midcaps witnessed a golden cross on their charts this week. Do you think uptrend is likely to continue? 

A: Interestingly, the headline index has hardly echoed street sentiments as mid and smallcap indices have not participated yet with the same gusto.

So far in 2019, both Nifty Midcap and Nifty Smallcap indices are trading lower by 1 percent in comparison to Nifty’s 9 percent upmove.

However, studies of fractal nature suggest that the best is yet to come from the midcap index. Since 2008, Nifty Midcap-100 index has seen a tendency of correcting for a span of 13-15 months (major corrective moves).

After the declining phase, it has given a breakout from the downward sloping trendline. In the first instance, it rallied back to the previous peak swiftly.

On the second occasion, the resulting upmove after the breakout was time-consuming; nevertheless, it rallied yet again to earlier high.

In the current set up, the index bottomed around its 4-year mean and in the process completed a corrective phase of 14-15 months.

Despite a rally of ~10 percent from the February lows, it is yet to stage a breakout past the descending trendline. Sustenance above three-digit Gann number of 190(00) would signal the start of a new upmove.

The recent rally is at the nascent stage of a major upmove and support of 4-year mean (which coincides with Feb 2019 low) is likely to act as strong support.

Q: Despite benchmark indices have hit a record high, there are only around 50 names that have hit 52-week highs on the BSE. This is not a sign of a strong bull market. What are your views?

A: Strength is seen in the pockets/stocks that have been the outperformers (i.e., Reliance Industries, HDFC and private banking stocks). Meanwhile, stocks/sectors that have not participated (i.e., pharma and auto) are acting as laggards despite index hitting the 12K mark.

So, this bull market is rewarding the stocks that are outperforming. After an upmove leg driven by largecaps, eventually, midcaps would start participating, waking up from their deep slumber.

A reversion in the Midcap/Nifty ratio from multi-months low above 1.58 would lead to a change in sentiment and more stocks from broader markets would start participating.

Q: What are your expectations from markets in the first 100 days of PM Modi’s second stint? Historical data suggests Sensex gave positive returns after three out of four recent election verdicts. Do you see a similar trend?

A: I would prefer a holistic view rather than focus on the performance of the next few weeks. In fact, historical evidence suggests that irrespective of the trend, Nifty tends to face a challenging environment during every election year.

We probed Nifty’s historical data (i.e., performance in election years of 1999, 2004, 2009 and 2014) and observed that it tends to drop more than 5 percent at least four times during election years.

So, it is unlikely to be a one-way move on the upside, speed bumps along the way are going to make the ride bumpy for market participants.

Q: What are the stocks that witnessed a breakout recently and are ripe for cherry picking?

A: Here is a list of stocks which are about right for cherry-picking:

Larsen & Toubro: Buy| Target: Rs 1,680| Stop loss: Rs 1,465

After being in a phase of consolidation at the top of its rally for more than a year, it finally staged a breakout on the upside in this month’s trade. It is showing the trait of a stock which is in a strong uptrend since February 2019.

Prior to recent breakout, it went through a phase of sideways correction as the stock took support around the two-year mean. Thereafter, it provided a swift recovery and eventually broke past the previous peak of Rs 1,460.

We expect the stock to replicate the momentum it had seen in early 2017. Based on the above observations, we recommend a buy on L&T above Rs 1,530 with a stop loss of Rs 1,465 for the target of Rs 1,680.

Bharat Electronics: Buy| Target: Rs 128| Stop loss: Rs 102

It had a torrid time in 2018 as it corrected by ~60 percent and marked a low of Rs 75. Since then, the stock has managed to defend its low on multiple occasions. It found solace around the support 10-year mean that coincided with multiple lows on broader charts.

The month of March rekindled the lost momentum in BEL as it staged a breakout from the descending trendline. However, it lacked subsequent follow-up moves in April 2019 that led to shakeout trade.

The month of May saw BEL breaking out the confluence of hurdle around Rs 100. Based on the above rationale, we recommend a Buy on BEL above Rs 110 with a stop loss of Rs 102 for a target of Rs 128.

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