Metal Stocks: Vedanta, Tata Steel, Hindalco, JSW Steel, and SAIL Facing Potential Downturn?

Synopsis: Historical trends and technical analysis suggest that metal stocks like Vedanta, Tata Steel, Hindalco, JSW Steel, and SAIL may underperform in the coming months. Following past general elections, the Nifty Metal index has consistently shown significant declines. Technical indicators and the dollar index's movements further support a bearish outlook for the sector.

Historically, metal stocks such as Vedanta, Tata Steel, Hindalco, JSW Steel, and SAIL tend to underperform post-general elections. Following the 2019 elections, the Nifty Metal index dropped by 18% between July and September, compared to a 3% decrease in the Nifty 50. Similarly, post-2014 elections, the index fell by 13%, despite a 5% rise in the Nifty 50.

Technical Analysis and Historical Trends

Technical analysis and historical data support the likelihood of a continued downturn in the metals sector. Neeraj Agarwal from JM Financial highlighted that the Nifty Metal index closed lower in five of the last ten Augusts, with an average return of only 0.8% from July to September. In September alone, the index dropped seven times with an average negative return of 2.3%.

Agarwal also noted the formation of a bearish Hanging Man pattern in June, indicating potential further weakness. In July, the index faced consistent resistance around the 10,000 level, breaking below the 8-day EMA levels, suggesting more declines ahead. Major sell-offs in the last year ended at the 100-day or 200-day EMA, currently around 9,000 and 8,300 levels, respectively.

Futures and Options Insights

In the futures and options (F&O) segment, the July series began with lower than average cumulative future open interest in the sector, except for Hindustan Copper and Vedanta. This indicates a lack of confidence in large-cap stocks for sustained strength. Open interest accumulation exceeding 10% was only observed in Hindustan Copper, Steel Authority of India (SAIL), and Jindal Steel and Power (JSPL).

Impact of Dollar Index

The dollar index (DXY) is another critical factor influencing the metal sector's performance. Historically, the NSE Metal Index has shown an inverse correlation with the dollar index. The DXY sustaining above its long-term and short-term moving averages indicates potential challenges for the metal stocks. Immediate resistance for the DXY is at 106, with a potential move towards 109-110 levels if a breakout occurs. Strong support for the index is at 104.50 levels, suggesting limited downsides from the current levels.

Outlook

Despite an 8% underperformance over the last 1.5 months, the metals sector has maintained a strong overall performance. However, JM Financial anticipates this trend of underperformance to persist. The historical data, technical indicators, and cues from the dollar index all point to a challenging period ahead for metal stocks.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Please consult with a professional advisor before making any investment decisions.