Trading and investing are filled with thousands of strategies, each one offering a distinct approach to making profits. Many traders gravitate toward capitalising on trending sectors or stocks, riding the wave of positive momentum. However, there is a less conventional strategy that remains underutilised yet holds significant potential – accumulating assets during a sector’s downturn and patiently holding them for future gains.
This strategy involves a contrarian approach, where investors choose to go against market sentiment, seeing value in moments of market weakness rather than rushing to invest when everything is trending upwards.
One of the strategies that this contrarian approach can be applied – by using Seasonality Analysis on the Nifty FMCG Index.
Seasonality analysis is a technique used by traders and investors to identify recurring patterns in the stock market, often linked to specific months, quarters, or seasons of the year. The core idea behind seasonality analysis is that market performance during certain times of the year can exhibit consistent trends, either positively or negatively.
Seasonality analysis: The Nifty FMCG Index
The Nifty FMCG (Fast Moving Consumer Goods) Index is a key benchmark for companies within the FMCG sector in India.
Source: RZone, Definedge Securities
According to seasonality analysis, February has historically been the worst-performing month for the Nifty FMCG Index. In fact, over the past 14 years, February has posted an average loss of 1.23%, with only four positive closes against ten negative closes. This performance makes February the least favourable month for the index, which aligns with a key principle of contrarian investing – accumulating when others are retreating.
This strategy hinges on the fact that after February’s downturn, the following five months typically see significant recovery. The Nifty FMCG Index has exhibited a strong performance in the months following February, with March, April, May, June, and July consistently posting positive returns.
For instance, March has shown an average gain of 2.89%, followed by 2.67% in April, 2.40% in May, 1.85% in June, and a solid 3.45% in July. These months boast a strike rate of over 70%, suggesting a high probability of favourable returns after February’s negative performance.
To reinforce the validity of this contrarian strategy, it’s essential to assess whether the technical indicators support the likelihood of a reversal in the Nifty FMCG Index.
Nifty FMCG Index, monthly chart
Source: TradePoint, Definedge Securities
On the monthly chart of the Nifty FMCG Index, the 34-month Exponential Moving Average (34MEMA) has consistently acted as a strong demand zone since 2015. The Moving Average Channel, which uses the 34EMA for both highs and lows, has shown significant price support, indicating that the index is likely to find buying interest during its current pullback.
Furthermore, the Relative Strength Index (RSI), which measures overbought or oversold conditions, has entered the oversold zone for the third time in the past decade. This suggests that the Nifty FMCG Index is potentially due for a reversal, making this an opportune time to accumulate positions ahead of a market rebound.
Stock picks to watch: Nestle India and Marico
As part of this contrarian strategy, two stocks within the Nifty FMCG Index stand out due to their technical setups and potential for recovery: Nestle India and Marico.
Nestle India
Source: TradePoint, Definedge Securities
Nestle India, a leader in the FMCG space, is showing a compelling technical pattern on its monthly chart.
The stock has found strong demand in the 34MEMA channel, signalling that buyers are stepping in at these levels. Over the past four months, the stock price has been consolidating within this channel, indicating accumulation rather than panic selling. This consolidation phase is often seen as a healthy sign of stability before a potential breakout.
Moreover, the RSI has started turning upwards, further supporting the likelihood of a reversal in its price action. If the stock continues to hold within this demand zone, it could potentially see a strong price rally as market sentiment shifts in its favour.
Marico
Marico, another major player in the FMCG sector, has exhibited a strong technical setup that aligns with the contrarian strategy.
Source: TradePoint, Definedge Securities
On its monthly chart, the stock has reversed from the 34MEMA channel and recently broke out of a key trendline at Rs. 580 in May 2024. This breakout was followed by a rally that saw the stock surge to over Rs. 700.
The breakout was retested, and Marico has resumed its bullish momentum, suggesting that the stock is well-positioned for further gains. Given the bullish setup and the overall strength in the FMCG sector, Marico could potentially continue to benefit from a broader market recovery, making it a stock to consider for accumulation during a dip.
Patience is key
While the strategy of accumulating assets during a sector’s downturn may seem counterintuitive, the best opportunities often lie in these challenging periods. By embracing seasonality analysis and looking for patterns in market cycles, investors can position themselves to benefit from future rebounds. For the Nifty FMCG Index, February represents a historically weak month, but this downturn often sets the stage for strong performance in the months that follow.
By focusing on stocks like Nestle India and Marico, investors can potentially leverage technical indicators and seasonality trends to build positions in anticipation of a market reversal. As always, the key to success with this contrarian strategy lies in patience and discipline – buying when others are selling and holding for the eventual gains.
Disclaimer
Note: We have relied on data from http://www.definedgesecurities.com throughout this article. Only in cases where the data was unavailable have we used an alternate but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Brijesh Bhatia has over 18 years of experience in India’s financial markets as a trader and technical analyst. He has worked with the likes of UTI, Asit C Mehta, and Edelweiss Securities. Presently he is an analyst at Definedge.
Disclosure: The writer and his dependents do not hold the Stocks discussed in this article. However, clients of Definedge may or may not own these securities.
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