The metal sector is about to turn oversold and we could see beginning of value buying or contra buying at the current or little lower levels.
By Shrikant Chouhan
In the previous week, two sectors— CPSE (central public sector enterprises) index and Nifty Metal Index—outperformed other indices.
The CPSE index added 4.97 percent to the previous week and metal index gained 2.96 percent and closed at 2,358.
For the week, we are choosing a metal index for analysis.
We are considering data for the 2015-19 period because around this time markets faced a number of major events like national and state elections, US polls, Brexit currency fluctuation, exceptional fall and rise in crude prices, the demonetisation of high value Indian currency notes and the ongoing tariff war.
These events were unpredictable and impacted commodity sector heavily. The CPSE index is mainly depends on the news flow from the government, which is highly uncertain and difficult to analyse.
The metal index made a low of 1,450 in the year 2016, when crude prices were at $33 per barrel. From there, it doubled in just 24 months in the year 2018.
During the same period, the number of metal stocks doubled, but few such as Vedanta and JSPL gave five-fold returns.
JSW Steel quadrupled, Hindalco, NALCO and Tata steel tripled. The metal sector is the most sensitive sector to global and domestic developments.
It is also sensitive to market’s liquidity conditions.
In the previous week, China cut credit reserve ratio (CRR) by 50 basis points to infuse liquidity in the market. It has a direct correlation with the metal index that could improve in the coming months.
It essentially means that at the global level, major economies have started taking steps to fight the recessionary phase and we could see more developments and measures from them.
Our government is also addressing the issues that auto and other major industries are facing, which is a positive for the economy as well as the metal sector.
Indirectly, it will support the metal sector, which provides raw material to the industries. That is the reason metals will perform if the government takes steps to support the economy.
Technically, the metal index doubled in two years, gained 2,800 points but in last 21 months, it has lost about 2,100 points, which is nearly 75 percent erosion.
It implies that the sector is about to turn oversold and we could see starting of value buying or contra buying at the current or little lower levels.
When we scanned 13 stocks metals and mining stocks, we found that Hindalco and JSW Steel were outperforming, as they had eroded nearly 50-65 percent of their entire gains.
Based on the above observations, findings, and technical patterns, we should focus on JSW Steel and Hindalco from the outperforming space. We need to focus on Tata Steel as it’s a liquid stock and helps to have a positive beta.
Technically, JSW Steel is diverging positively and till the stock is above 200, it could move to 250 above which the stock has spent maximum time. It was earlier major support for JSW Steel. A close below 200, it would fall to 180.
Hindalco has completed corrective pattern at 170 and for the last five weeks, its has sustained well above it, whereas during the same period, the metal index lost nearly 10 percent.
Till the stock is above 170, it has scope to move up to 205/210, which was the earlier highest level for it. Below 170, again it would turn negative and move towards 150.
Tata Steel has corrected to extreme levels and has formed multiple bottoms at 328 and is showing signs of a strong pullback in the short term. We can expect minimum 370 on the higher side. Below 328, Tata Steel could fall to 300.
(The author is a senior VP (Technical Research), Kotak Securities)Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.