Vedanta, Tata Steel, Hindalco, JSW Steel, SAIL: Metal stocks to lose sheen? History suggests so

Metals sector looks set to underperform the market in coming months, historical trends, technical charts and cues from dollar index movement and futures and options segment suggest so. 
Data showed the Nifty Metal index, which has Tata Steel Ltd, Hindalco Industries Ltd, JSW Steel Ltd and Vedanta Ltd as heavyweight constituents at present, tanked 18 per cent post 2019 general elections (July-September period) and 13 per cent post 2014 elections. This was against a 3 per cent drop in Nifty post 2019 elections and a 5 per cent jump in the 50-pack index post 2014 elections. 

Besides the Nifty Metal closed in the red in five of the last 10 Augusts, with an average return of mere 0.8 per cent for the July-September period. In fact, Nifty Metal closed September lower in seven instances, with an average negative return of 2.3 per cent, Neeraj Agarwal of Technical and Alternative Research at JM Financial said. 

On the technical front, Agarwal said the NSE Metal index formed a Hanging Man pattern, a bearish formation, in June. In July the Nifty Metal index is continuously facing resistance at around the 10,000 level, he said.

"With the index now breaking below the 8-day EMA levels we expect further weakness to prevail/ All major selling in the last 1 year has ended at its 100-day EMA or at its 200-day EMA, which is currently placed at 9,000 and 8,300 levels respectively," he said.

On the F&O side, the July series has started on the back of lower than average cumulative future open interest in the overall sector -- except for Hindustan Copper and Vedanta, suggesting lack of confidence prevailing in the large-cap stocks for a sustained strength, Agarwal said.

Since the inception of the current series, open interest accumulation of over 10 per cent has only been observed in Hindustan Copper (HCP), Steel Authority of India (SAIL) and- Jindal Steel and Power Ltd (JSPL), he added. 

Add to that, the dollar index (DXY) has started sustaining above its key long-term and short-term moving averages. Historically, the NSE Metal Index has exhibited an inverse correlation with the dollar index.
  

"The dollar index has an immediate resistance placed at 106 level. The level coincides with the trend-line resistance drawn by joining all highs in the last 1 year. A breakout above the 106 levels would suggest a potential move towards 109-110 levels. A strong support for the index is placed at 104.50 levels, suggesting limited downsides from the current levels," Agarwal said.
   
JM Financial said despite a noticeable underperformance (8 per cent) over the last 1.5 months, the metal sector continues to maintain a strong overall performance advantage. "We anticipate the current trend of underperformance to continue going forward," Agarwal said.