Dissecting Nifty's (Indian Stock Market) Internals

In Stock Market, Price is God and Yet, Stock Market is the only place where majority doesn't believe in God unlike in real life....
O Ashuji...

What makes market very interesting is participants most of the time tend to act differently than what they believe in. In other words - Knowledge doesn't equal to behavior. Participants behavior tends to be cyclical because of "extreme brevity of financial memory" (extreme brevity of financial memory was famously quoted by J K Galbriath in his narrative A Short History of Financial Euphoria). This makes it very interesting to study sectoral moves within indices because it tends to reflect participants behavior. 

DISSECTING NIFTY'S INTERNALS....
As discussed in various previous blogs, world markets had very correlated behavior till 2012 end. Since 2013, many emerging markets have started to tumble gradually. In India's case, there was marked difference in behavior within indices and broad market as such. Broad market has broadly collapsed since January 2013 (few blogs in Jan and Feb did warn about the same), while within Nifty performance has become polarized (fashionable term used by financial comedians on CNBC). There has been marked out performance by Defensives (Broadly includes IT, Pharma, FMCG and to certain extent Auto) while Infra, Capital Goods, Metals, etc collapsed.

Based on my understanding of markets I have divided markets in following way...

Market Sectors & Weights (as on July 2013)

Meaningless sectors are those sectors/stocks which have very small weight, those stocks are down 30-40% at least, they swing very wildly,are troubled in form of government policies, high leverage, etc

Price Performance (monthly % moves) of Nifty

Its widely known that capitulation happens with sharp fall in quality/defensive stocks and durable rally can never be led by broken sectors (in our case "meaningless sectors" - Infra, Cap Goods, etc). With above in perspective lets study price performance of Nifty since 2013.

1) Meaningless Sectors have been falling sharply since 2013. Cap Goods, Cement, Metals & Mining are part of Meaningless Sectors. Any bounce driven by these sectors will be Meaningless as it is happening now. Many are reading too much into recent bounce in metal stocks. To put things into perspective stocks like stocks like Tata Steel didn't have single month positive till August 2013 and stock was down 64% till August. Same with other stocks like Jindal Steel & Power, Hindalco. Reading anything into these stocks is absolutely meaningless. Zombies are normally wild and we tend to get feeling that they are alive. 

2) Financials and Defensives held Nifty till June 2013 while broad markets continued to collapse (all my statements can be corroborated from the price performance table). Post June 2013 there was sharp fall in Financials, while Defensives held on. So only pillar for Nifty now was Core Defensives - IT, Pharma and FMCG accounting for 35% of the weight. 

3) However nature of market changed sharply in August 2013, It could be either capitulation of beginning of capitulation. Pharma/FMCG stocks collapsed in August 2013. Stocks like ITC, Sun Pharma, Lupin ,etc had their biggest monthly fall of 2013 in August. IT stocks accounting for 14% of Index weights held on positive and IT Index hit all time high. 

4) IT remains the only index which survived July-August 2013 storm and makes capitulation picture incomplete. I don't know if it will be global correction which will drive it lower or over-crowding into the sector, but last leg of index capitulation will be driven by IT.