The index is trading near its 52-week low level and that is the first red flag that investors should watch out for. Any index or stock which is trading near 52-week low shows the first sign of weakness
The Nifty auto index has been in a corrective phase since the last 1.5 years and many investors are wondering if the sector has bottomed out yet. To answer this question, we need to look at some historic data.
The first rally in the auto index had started back in April-2013 from the 4,100 level and it reached till the 9,100 level in January 2015. So this index has more than doubled in less than two years’ time.
After this monster rally, the sector was in a correction phase for almost a year where it corrected nearly 25 percent from that 9,100 level.
After this, it has again started rally in March 2016 from 7,100 level and reached till 12,100 in December 2017. So again, sector has given 70 percent return in less than less than two years’ time.
Despite pessimism and expensive valuations, this sector has given strong returns between 2013 and 2017 and in four years’ time it has given 3-fold returns.
After four years of strong rally, the Nifty auto index has been in corrective phase since January 2018. The auto index has made a top around 12,100 level in January 18 and in last 1.5 years’ time, it has corrected nearly 35 percent and currently trading near its 52-week low level of 8,000 level.
Investors have seen a strong rally in the past and currently they are trying to find a bottom in the sector. So, the real question is whether the sector has really bottomed out?
The index is trading near its 52-week low, and that is the first red flag that investors should watch out for. Any index or stock which is trading near 52-week low shows the first sign of weakness. Secondly, it is trading below its short, medium- and long-term moving averages.
In last year, every short covering or a pullback rally has been sold into with the higher force. So, the answer is no, the sector has not bottomed out though it might be a few months away before we see some sign of revival.
Investors have seen a strong upside rally between 2013-2017, and that is why they are eager to catch this falling knife.
But they need to understand that to make an investment decision you need to at least see the first signs of revival on a technical or fundamental front and looking at the current scenario, we are still few months away in this sector. So in conclusion, there is no sign of recovery in the sector and investors may avoid this sector for now.
(The author is Technical Analyst at Monarch Networth Capital.)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.