Hit Speak - Time to be Prepared, Not Worried

The markets have continued to follow the same trend of large-cap outperformance versus small and midcaps underperformance that we have seen for quite a few weeks now.  We alluded to that in our last blog post on 10 August 2021.   The frothy rally in the small and midcaps seen still remains something in the past. Broader markets have yet to find consistent strength. 

The question of how to position ourselves keeps vexing a lot of investors.  Our view remains the same as before.  And that is to be in sectors that have shown strength/resilience in the past few weeks in terms of price action. And in companies with strong earnings visibility over the next few quarters. 

Overall our sense is that the small and midcaps space is taking a much-needed breather after the strong and often frothy rallies seen in the past.  All this while the large caps are doing their bit to carry Nifty higher.

Some of the pockets that have shown good strength in the last few weeks have been the index heavyweight large caps. Besides these, FMCG and consumer staples also seem to be showing good strength. I will be discussing some interesting charts to drive home our assumptions.

The FMCG index seems to be showing good signs of a strong breakout. Stocks from this sector have been relative underperformers over the past few weeks and months. But now most of them seem to be breaking out/on the verge of breakouts.

Nestle chart has broken out above all time highs. 

I would like to have a look at the medium term chart of Reliance Inds. I have put up a GMMA (guppy multiple moving averages chart)  weekly chart of RIL.  As shown in the chart,  we can see a breakout from a flag like consolidation on this chart.  If the pattern plays out, RIL can be a big leader going forward and can lead Nifty to much higher levels.   Blue lines indicate longer-term moving averages and usually indicate an investor mindset.  It offers support during short term market corrections.  Red lines indicate shorter-term moving averages and indicate trader mindset.  Best setups are those where longer term moving averages are consistently moving up and shorter-term moving averages are coming out of compressions and breaking out on the upside. Something similar is being seen in RIL.

Another good company to look at is Schaeffler India. The company has shown very good growth and strong management commentary post the June quarter results. Its stock price shows a good breakout past all time highs of around 6000 and now consolidation above that level.

HDFC Ltd has broken out above its 6 month highs of 2690 and is managing to stay above that level since past few trading sessions.

To conclude,  I feel that if we are invested in small and midcaps it makes sense to be careful and follow strict stop losses or be very choosy to be in fundamentally good companies.    There does not seem to be any panic bells yet, but it always helps to be prepared and have a plan ready in case things go awry. 

Regards
Dr Hitesh Patel