Bank Nifty Pole Vault! An Interesting Time Ahead

The Bank Nifty has had a spectacular run in 2019 so far. Propelled by a wide variety of factors ranging from expectations on profitability next year (55% plus of Nifty EPS FY20), technical strength,  continuing flows, resolution  of bad debts or plain and simple short covering- one could rationalise it any way one wants –  The question now however, is this move near an end in the short term?

HDFC Bank, ICICI Bank and Kotak Bank together account for more than 65% of the Bank Index and each of these have  had a massive run in March 2019. Gains in these apart from others (Axis SBI and Indus Ind account for another 25%) have led to a 10% plus rise in the index in March alone.

Our quant indicators have highlighted the first instance of a reversal in this trend on Friday, March 22, 2019. The Bank Nifty to Nifty ratio crossed an all time high of 2.59x – and by doing so , it created a 2 Sigma event – Each time in the past that the index has travelled beyond this level – remember this time it has coincided with an intraday high of 30,000 which couldn’t be taken out – the ratio has reversed.

Each reversal in this ratio earlier has typically meant that the Bank Nifty underperforms the Nifty by almost 15% and for a period ranging from 2 to 6 months. While the price action on Friday March 22 confirmed this, the longer term charts have still not reversed- but its likely that this will happen in the ensuing week to expiry.

We believe that the broad  markets may therefore come under some bit of pressure as we head into the elections – and Nifty, which looks robust for a good run unless global markets throw negative surprises,  will have to now come up with new winners – maybe from the IT and auto sectors which really haven’t done well so far.

Mind you – the above analysis is based on past history as well as a one day action on March 22, 2019. There is always the probability that history may not repeat itself – so any trades you construct with the weight of history behind you need to have tight stops!

PS:  Our Earlier Long Short Trade (https://www.plindia.com/blog/will-dow-down-nifty/) involved going short Dow (At 24640) and Long Nifty ( At 10568) is so far up 5.5% – We believe the next 2-3 months will be when the trade really begins to fire. Keep watching this space!

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