Large caps in India have been on a tear relative to their small- and mid-cap counterparts, which we’ve spoken about at length over the past few months. With that said, it’s no surprise to see that the Nifty 50 is leading to the upside once again by clearing its recent range on an absolute basis and making new five-month closing highs.
What this breakout reaffirms to us is that we want to be long large-cap stocks in some of the strongest sectors such as financial services, IT, consumer goods, and even potentially energy and pharma. Sure, some stocks within large caps are weak, and we’ve written about that for premium members here and here, but the Nifty 50 is a cap-weighted index, and the sectors that are weakest collectively account for only one-quarter of the index.
In addition to keeping an eye on the Nifty 50 on an absolute basis, we also want to be watching it relative to the Smallcap 100 index. The chart below shows the massive outperformance of large caps relative to small caps year to date. After an aggressive run in this ratio, we may be due for a bit of a pause as the ratio approaches potential resistance at the 38.2% retracement of its 2013 into 2018 decline. Still, on an absolute basis, the Nifty 50 has the cleanest trend of the large-, mid- and small-cap stock indexes.
The Bottom Line
Large-cap stocks in India continue to lead, and we want to be buying the strongest of them. This breakout in the Nifty 50 has a price target nearly 17% higher at 12,820 as long as prices are above 10,530, so we’ve got room to run in this new leg higher.
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