Nifty IT – Stretched Valuations – Investors Caution Zone

Listen, IT is the hottest sector when USDINR is hitting the all-time high. pharmaceutical and information technology are the sectors which earn a big part of their revenues in dollars. Every dollar earned through exports means more money added to the bottom line. Year to Date Nifty IT Sector gained 36.4% and a whopping 700% returns since Feb 2009. But I’m here to tell that “you should always leave a party early when the sector is on steroids”.

IT sector is highly dominated by momentum investors who storm in and buy stocks with high valuations solely because prices have been going higher. Momentum investors chase such risky and high volatile counters and they are the last one to get caught at the market top. They compound during stock accumulation and amplify the risk when they are liquidating.

Nifty IT sector Historical Monthly Charts

Nifty IT Weekly Momentum

Building a bubble isn’t complicated, but it takes time, Positive feedback, and a bit of momentum. Currently, monthly momentum in IT sector is at the extreme above 94 levels. This is the third time since 2009 reaching such extreme zone. However Weekly momentum is falling for the last two consecutive weeks indicates a possible medium-term weakness.

PE valuations and other fundamental factors are also stretched in Nifty IT stocks.

Market Cap and Fundamentals of TOP IT Stocks

Nifty IT sector and Bollinger Band – Monthly Charts

Bollinger band measures momentum and helps to identify when is the best time to pull the trigger. Nifty IT sector is relatively overvalued as price trades around the upper Bollinger band on the monthly timeframe.

Nifty IT Market Profile Charts

Market profile study indicates clearly momentum buyers are in control and momentum buyers are chasing the price madly with a fair-traded price around 12544 levels.

Overall higher timeframe indicators are highly stretched and possibly the environment doesn’t fit new investors/existing one to chase the momentum at current levels. Don’t be the last beer in the fridge and don’t overstay a party. Momentum trading usually hurts when the markets are about to take a ‘U’ turn.