By Milan Vaishnav
Indian Union Budget 2021-22: The Union Budget is one of the most important domestic external events that influence the markets. The year that has gone by between the previous Union Budget and the upcoming one slated to come up on the 1st of February has stayed highly eventful. The headline Index went on to slip to 7511-mark and then staged an equally astounding rally which saw the Index falling just short to doubling itself from that level. In the process, we also saw the BSE Sensex testing the historic 50,000-mark, which was unimaginable at one point following the rout caused by the pandemic in the first quarter of 2020.
It is extremely important to note that the current rally in the equities has been the result of a high risk-on setup that has been in place due to severe weakness in the US Dollar. The US Dollar index has been at its multi-months low; the Dollar weakness typically results in Emerging Markets seeing more robust FII inflows. India has been a no exception to this.
As we approach the Union Budget in one week from now, we will need to alter the way we approach the markets as we approach the Budget day and for a few days after that. Finance Minister Nirmala Sitharaman has been promising a “never-before” kind of budget; however, the technical setups in the markets should not be ignored. An examination of the sectoral setup in the markets presents an interesting view.
Over the previous week, after the Sensex tested the historic 50,000-mark and with NIFTY falling a little short of 15000 (a high of 14753), the markets have shown prominent signs of taking some breather. This is further confirmed by the Relative Rotation Graph which shows the present structure of the sector rotation happening in the markets.
It is evident that that high beta names such as BankNifty, Private Banks, and Financial Services Index which is still in the leading quadrant are seeing sharp paring of Relative Momentum when benchmarked against the broader NIFTY500 Index.
In the same breath, if we look at the traditionally defensive sectors like FMCG, Consumption, and also at Energy Index, it appears that they are seen sharply improving on their Relative Momentum front and are placed in the improving quadrant. This points at the likely end of their relative underperformance against the broader markets. The Pharma Index, which is in the lagging quadrant and the IT Index which is in the weakening quadrant are also seeing sharp improvement in their relative strength.
This makes an interesting observation that the smart money is moving from the high beta sectors to the defensive ones. Regardless of any sharp moves that we may see ahead of the Budget and after that, it would be prudent if the traders and investors focus more on the defensive bets rather than chasing the high beta names.
Focusing on the good quality stocks which have not run up too hard in the previous quarter and the ones that have an improving Relative Strength will go a long way in adding a protective layer and helping approach the Budget with a stable risk-reward proposition in place.
(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services. Views expressed are the author’s own.)
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