Today was a very strange kind of day for most portfolios. IT stocks were zooming, but the rest of the market was not. If you had IT stocks in your portfolio, you would have seen some movement. Otherwise, it was a dull and drab day for most portfolios. We’ll discuss whether the IT sector is rebounding hard or if this is just a flash in the pan, along with the long-term trends of this sector at the end of the blog
Market Overview
Where are the markets headed? On the Nifty, the gains were nice at 0.77%. In fact, it almost touched 24,600 on the highs. In just a matter of less than a month, we’ve come a long way from 23,100 to 24,500. Without having any major moves in this last month, we’ve traversed quite a distance from the election high top. Small moves, but consistently going up. It doesn’t seem like we are going to let this go anytime before the budget at least, and post-budget, there may be some sell on news that is possible in some sectors. Some of the sectors running very hard, like rail stocks and public sector enterprise stocks, may experience some sell on news during the budget. Because, as the saying goes, trees don’t grow to the skies, and that’s what is happening in some of these stocks. But we will follow the trends and stay invested, even if stocks are looking at ridiculous valuations.
Nifty Next 50
Nifty Junior was down 0.44%. While Nifty was up 0.7%, the next 50 stocks were down 0.44%. This lopsided move was due to specific reasons.
Nifty Mid and Small Cap
Mid caps were down by 0.06%, so not going anywhere. The entire week, in fact, has been very flat. But flat is not bad, especially when hanging at new highs. Small caps were also down again, very flat with no movement in the last week, but portfolios have moved. With the right stock selection, portfolios have moved up in the last week, but the indices have not.
Nifty Bank Overview
Bank Nifty was very volatile today, just like yesterday. A huge move up was seen, followed by a smash down. Intraday traders have been hurt in the last few sessions due to this intraday volatility, but overall, no gains at 0.02% on that index.
Nifty Heatmap
Today’s heat map shows green only in one sector, which is IT stocks. TCS was up a fantastic 6.6%, with a rub-off effect on Infosys (3.57%), HCL Tech, Wipro, and Tech Mahindra. Reliance made a 1% move, and Axis Bank was up 1.5%. LTIM also moved up 3%. Other than that, most stocks were flat or slightly in the red.
In the Nifty Next 50, more red was seen. IRFC was expecting the budget to do some wonders for all rail stocks, leading to a 5% increase. Zomato has been doing very well, showing remarkable consistency. Nokri, holding a significant stake in Zomato, was up 3.74%. Big losers included capital goods stocks like PFC and REC, and real estate has been going down consistently for the last two sessions. ABB and Siemens also lost some ground, and IOC, which was running very hard, was down 4%. However, the overall IOC chart still looks very good.
Sectoral Overview
Sectoral data showed only one big green bar for IT stocks. In the last month alone, IT stocks have moved 13%, the highest gain among all sectors. This redemption is notable, especially since IT stocks were in deep red just a month ago. On a twelve-month basis, IT stocks are now at a respectable 34%, compared to FMCG at 12%. Pharma also did well at 48%. Defensive sectors like pharma and FMCG see sector rotation when the risk-on sectors get tired or become overvalued. Real estate has come off 1.5% in the last month, and PSU banks have lost 3%. Metals are down 1.3%, while other sectors have single-digit gains.
Sectors of the Day
Nifty REALTY Index
Real estate is in a downtrend but has not yet broken below its support. The real test is whether it will break below the election day high, which could indicate further weakness in the sector.
Nifty IT Index
The Nifty IT index shows that it made a top in February 2024, then sharply dropped from 39,000 to 31,000, a 25% cut. The recovery has been very sharp in the last month, reaching a new high with a 4.5% gain in a single day. This suggests a potentially significant move ahead
Stocks of the Day
Sonata Software
Sonata Software is in the stock spotlight today. The stock experienced a huge gap down in May but has recovered from 470 to 710 in just a couple of months. Long-term performance shows impressive gains from levels of 430 to 710, despite short-term setbacks.
Story of the Day
Now let’s talk about the IT sector. Nifty IT soared 5% on strong TCS Q1 earnings. Although TCS’s CEO mentioned uncertainty about being back on the growth path, the market celebrated the results. IT stocks like Coforge, TCS, Infosys, Wipro, and others saw significant gains. The IT index as a whole is breaking out to a new high, indicating strong potential.
From June to now, the CNX IT index has gained 21%, outperforming other leading sectors. PSU banks are at 2%, energy at 10%, FMCG at 10%, Nifty at 11%, pharma at 11.5%, and public sector enterprises at 13%. The IT sector has beaten the rising trendsetters of the last many months.
Looking at the IT index’s long-term performance, it hit a new high in 2022 and experienced a steep price increase post-COVID. The index went from 11,000 to 39,305 times. This consolidation resembles a cup and handle pattern, suggesting a potential sharp move ahead. Sector rotation may be happening as the rest of the market becomes overbought or overvalued.
Comparing the CNX IT index and Nifty, the IT index has shown a significant advantage. In the last two and a half decades, Nifty has gone up 2500%, while IT stocks have increased by 46,000%. Even after peaks, IT stocks have demonstrated resilience and potential for significant gains. For example, from 1996 to 2000, the IT index increased from 80 to 8500, a more than 100x move in just three years. This indicates that sectoral movements can lead to generational wealth creation.
Comparing the CNX IT index to the Nasdaq, the IT index has outperformed significantly. In dollar terms, the CNX IT index has gained 18,000% compared to Nasdaq’s 3300% in the last 30 years. This debunks the myth that Indian IT is not doing well compared to Nasdaq.
Be cautious in selecting IT stocks, as they are slightly heated up due to recent gains. However, the IT sector can potentially lead the rally going forward. Conduct due diligence and find good positional setups. For momentum investors, strategies will automatically find the IT stocks on their own.
