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Technicals Point to a Pause in India’s Rally

(Bloomberg) — 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.



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


© Bloomberg
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.”



chart: Nifty 50 Index's November surge looks extended relative to moving averages


© Bloomberg
Nifty 50 Index’s November surge looks extended relative to moving averages

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

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“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.

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