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One of the ways of identifying which sector to invest is by comparing the sector’s performance with that of the main Index (Nifty / Sensex in our case). Here are a set of charts where the concept is simply dividing the Index by the value of Nifty and plotting the same.
Great stuff!!!
Great charts!
Just an observation, some of the sectoral indices like IT, Pharma, FMCG etc are in reality 3-4 stock portfolio as they contribute 60-70% of weight in indices.
In that scenario, in your opinion, does it make sense to compare indices to Nifty?
e.g. One year back, Underperformance of Infy and Wipro (Big weight in CNX IT) would show IT index underperforming Nifty whereas most other stocks in CNX IT were probably doing fine?
How do you address that?
Thanks
Very True. CNX IT for instance has only 3 stocks that make up 80%+ of the Index. The other way of creating a Index would be price weighted, but here, we face issues when one share is too big. For example, in a price weighted Index of Tyre companies, MRF shall dominate like no other.
To overcome the disadvantages of Market Cap weighted indices, in US, you can find Fundamentally Weighted Index which are supposed to be better. But then again, that is more tough to create and update.
Also lack of any meaningful ETF for most of the indices mean that, we cannot even implement a strategy to buy them easily (unless we bought all the constituents in their weight).
Aha! RS !! 🙂 umm..did you also try dividing each index with the other eg. realty/energy, auto/pharma etc. and then one can maybe filter out the ratios above their 200 day SMA, or 40 week MA and that will show the strongest sector i guess..i am working on something on those lines. 🙂 hows your study of RS on stocks coming along sir ?. Thanks for sharing 🙂
Hi,
Have seen J C Peret do such stuff though with there being no way to trade those stuff, I did not see the significance of such a exercise.
Have put the RS project on the backburner as was working on other things, but need to finish it to see what kind of returns can one anticipate using such a philosophy.