2 weeks Ago
Timing the markets is often the key to success in stock trading. While some traders believe in bottom-up stock picking, where you focus on individual company fundamentals first, others swear by the top-down approach. The top-down approach begins with broader sectors before narrowing down to individual stocks within those sectors.
Starting with the sectors, analysing the outperformers and underperformers is the first step a trader follows. Some traders focus on outperforming sectors, investing in continuing momentum, while others target underperforming sectors, hoping for a reversal or recovery. Both strategies have their own risk profiles—outperforming sectors tend to carry lower risk due to the ongoing momentum.
In contrast, underperforming sectors carry higher risks as you invest in a turnaround with little or no current market support. In this article, we look at an underperforming sector that presents a potentially lucrative opportunity for risk-tolerant traders - the media sector. Despite its poor performance in recent years, let us explore why this sector may present an opportunity for those willing to take risks.
Over the last five years, the Nifty Media index has significantly lagged behind the broader market. While the Nifty 50 index has rallied more than 100% during this period, the Nifty Media index is still trading at levels seen in 2019 despite a thriving broader market. This stark underperformance raises a critical question: is the media sector primed for a rebound, making it an attractive target for traders seeking value in under appreciated stocks? To explore this possibility, a technical analysis will help us examine the Nifty Media/Nifty 500 Ratio Chart along with key individual stock patterns within the sector.
These insights could offer early indicators of recovery, guiding investors on whether a turnaround might be on the horizon for media stocks. Nifty Media vs. Nifty 500 Ratio One of the first steps in assessing whether the media sector has any potential to outperform is comparing it against the broader market.
The Nifty Media/Nifty 500 Ratio Chart is a valuable tool for this analysis. This chart shows the Nifty Media index performance relative to the entire Nifty 500 universe of stocks. The weekly ratio chart shows that since 2017, the Nifty Media index has consistently underperformed the broader market.
However, a positive divergence is visible on the Relative Strength Index (RSI) for the first time in seven years. This divergence indicates that the momentum of the sell-off may be slowing down, suggesting that the bears may be tiring. In simpler terms, the media sector might be at a turning point.
The positive divergence on the RSI suggests that the downtrend could be losing steam, which is often an early indication that a potential reversal could be on the horizon. As any experienced trader knows, spotting the early signs of a trend reversal can be a profitable strategy, but it comes with a higher level of risk. Another tool we can use to assess potential reversals is the point-and-figure (P&F) chart.
This technical charting method focuses purely on price movement, filtering out time, and volume fluctuations. The daily P&F chart of the Nifty Media index shows that it has recently turned upward, supported by a rising trendline. While a breakout above the 2,100 level still does not confirm this move, the initial signs of reversal are visible.
The index displays early bullish signals that align with a potential sector-wide recovery. We consider the Definedge Momentum and Performance (DeMAP) chart, a momentum-based indicator that helps assess whether a sector or stock is in an uptrend or downtrend. DeMAP essentially measures the relative strength of an asset compared to its historical performance, helping identify areas of strength or weakness.
The DeMAP chart reflects that the Nifty Media index has recently shown a sharp move from the “water" to the “sky," signalling a strong momentum shift. While this sector has historically lacked performance, this shift in momentum could indicate that the media sector is primed for a potential performance boost if the upward momentum continues. While this chart doesn’t guarantee that the Nifty Media index will outperform the broader market, it does suggest that the conditions are right for a reversal.
If momentum continues in the right direction, this sector could potentially see an impressive rally, making it a risk worth considering for contrarian traders. While the Nifty Media index shows promise, it is essential to look at individual stocks within the sector that could benefit from the overall trend. Based on technical analysis and patterns, two stocks in the media sector stand out as potential candidates for higher performance.
Sun TV Sun TV, a leading player in the Indian media space, is showing bullish signs based on P&F charting. The P&F daily chart (0.25% X 3) shows a Bullish AB=CD harmonic pattern, indicating a potential reversal.
This is further confirmed by the Double Top Breakout (DTB) pattern, a typical bullish pattern in technical analysis. The bullish reversal occurs near a previous high, marked by a strong horizontal trendline indicating that the stock may turn from the support zone. The reversal in Sun TV could support the broader Nifty Media index, contributing to the sector’s potential recovery.
Saregama Saregama, another prominent media company in India, has shown strong potential over the past few years, with its stock hitting new all-time highs before the recent market correction. On the weekly chart, the retracement from these highs has been accompanied by reducing volumes, signalling that the fall lacks strength and could be an opportunity for smart money to accumulate the stock. Moreover, the stock is currently taking support at the 50-week exponential moving average (50WEMA) channel, which has proven to be a significant demand zone for it.
As long as Saregama holds above this level, it could potentially set up a strong rebound, especially if the broader market favours media stocks. Turnaround for media? The Nifty Media index has underperformed the broader market for several years, but technical indicators such as the positive RSI divergence, the Point and Figure chart reversal, and the DeMAP momentum shift suggest that this sector could be on the verge of a recovery. Despite the higher risks associated with investing in an underperforming sector, there are signs that the media sector may finally turn a corner.
Stocks like Sun TV and Saregama appear poised for potential reversals, and if the broader momentum in the sector holds, these companies could help drive the Nifty Media index higher..
