Major trend reversal or simply a running correction; what lies ahead for PSU stocks?

Few experts that we spoke to believe that PSU Banks have some strength left in them and may bounce back after some more correction - going by the charts.

PSU stocks have been the darling of retail investors for the past one year or so. However, a free fall in PSU stocks on February 12 trading session with the likes of SJVN, RVNL and IRFC falling by more than 10 percent each up to 20 percent may change the equation for several traders and momentum investors.

Experts have been cautioning investors on the steep rally in PSU stocks since the beginning of this year.

With the correction now being sizeable, investors are realising the impact it could have on the portfolio returns. The correction is not restricted to PSU stocks with weakness seen across the board. However, the steep fall in PSU stocks specifically is what is catching few momentum investors off guard.

Is this a major trend reversal or is this just a running correction and most importantly will the rally restart and take PSU stocks to all-time highs again in 2024?

Few experts that we spoke to believe that PSU Banks have some strength left  in them and may bounce back after some more correction - going by the charts.

Also read: PSU banking stocks drag down Sensex, Nifty; analysts say consolidation likely to prolong 

Darpan Patil of Mumbai-based Rupic Consultancy believes the current correction in PSU banks at least is not a major reversal in trend. It is very much likely that the current price correction will retest the support zone or demand zone where the buying may emerge for individual stocks. Needless to say, all the PSU banks were and still trading in short term –overbought zones and it will be important to study the breakout levels for individual PSU stocks where the retest may happen , he emphasises.

Technical analysts believe support near breakout zones is possible where the demand zone lies for individual stocks. After all, PSU Bank index saw a 13 year breakout this month. It will be interesting to see if those levels are breached on the downside at the index level. The 13-year breakout in the Nifty PSU bank index happened at 5375-5400 levels in December 2023. If the PSU Bank index were to retest those levels it would mean another ~18 percent correction from current levels for Nifty PSU Bank index where some buying can be expected, going by logic presented by the chartists.

According to Purvesh Shelatkar, head of institutional broking at Monarch Networth Capital: “ Today’s correction is a mere reality check for the investors. The correction was steeper in PSU stocks, however, the midcap and smallcaps also saw healthy correction. The reason for today’s correction is clearly stretched valuations. Fundamentals were far behind the market valuations. The results season is adding to the market volatility and the results of several PSUs lead investors to re-evaluate PSU stocks and their prospects. In the short-run aberration can happen but in the longer run the fundamentals matter. Further correction in PSU stocks is possible wherever the excess premium exists as I see risk-off mood to persist in the markets in the short run at least.”

IRFC slipped by 13.50 percent with spurt in volume of over 2 times, IRCON by 12.64 percent with jump in volume of 2 times. Bharat Dynamics, RBNL, Cochin Shipyard, RCF, REC  saw correction of more than 5.98 percent each , up to 12.10 percent. The selling volumes were also higher suggesting that more weakness may persist in the PSU counters in the short term.

From their respective all-time highs which were made in past couple of months for majority of the PSU stocks, the stocks are down anywhere between 10 percent to 25 percent with railways PSU stocks taking the maximum brunt of the price correction followed by PSU power sector stocks and defense sector stocks.

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