It's the Best Time to Buy IT Stocks

Apurva Sheth

A few weeks back, I made my boldest prediction of 2017. I shared my views on the pharma sector and why it might be the best contrarian opportunity.

The sector has been going through a consolidation over the last two months and seems to be in the last leg of the fall. I am keeping a close watch on stocks in the sector so I can send out recommendations to my subscribers whenever I see an opportunity.

Now pharma isn't the only sector on my radar. I have been closely tracking the IT sector as well, which already seems like it's begun its uptrend and it could last till February 2019. More on this in a minute.

Last week Indian stock market ended with deep cuts of 3.5%. This was the biggest drop in Nifty for the year 2017. Selling was majorly driven by FII's who pressed the panic button and ran for cover.

Midcaps and Smallcaps suffered the most last week with cuts of 4.6% and 5.6% respectively. All the sectors faced selling pressure and ended with deep cuts.

Amid all this there is just one sector that has stood out from the crowd. Here's how various sectors performed during last week.

Sector Performance between 4 August - 11 August 2017

The IT sector outperformed every other sector across the week. This is a clear sign of strength by the software companies when most of the stocks and sectors were under pressure.

When a sector or a group of stocks stand rock solid in a storm you must acknowledge and dig deeper in to it. I did this for my Peak Profit Alert subscribers and shared the insights with them in last week's Progress Report (requires subscription).

I feel the insights are too good to be kept a secret. So I am sharing it with you here...

You know that markets go through a cycle of greed and fear. It's been that way for centuries. People were as greedy and fearful a hundred years back as they are now.

They tend to react in a similar fashion to greed and fear, which results in repetitive cycles. The reason for tops and bottoms may be different every time. But one commonality is that people were excessively greedy at the tops and excessively fearful at the bottoms.

History may not repeat but it rhymes.

I have spotted a rhythmic cycle of greed and fear that repeats every two years. I will explain this with the chart below.

2 Year Cycle in IT Sector
2 Year Cycle in IT Sector

This is a monthly chart of the NSE IT Index since inception. I have drawn vertical lines with a gap of two years or 24 months starting from February 2007, which was a major top in the index.

Each vertical line represents the beginning of a new phase for the index. The vertical line on February 2007 marks the end of 'the greed' phase and beginning of 'the fear' phase.

The index had rallied 109% between February 2005 to 2007. It dropped by 66% in the fear phase between February 2007 to 2009.

Here's a chart with the greed phase marked in green and fear phase marked in red.

Greed and Fear Phases in the IT Index
Greed and Fear Phases in the IT Index

The index enjoyed its best ever greed phase between February 2009 to 2011 with gains of 251%. The cycle turned in February 2011 and the index moved sideways till February 2013. It ended with a cut of 5%.

History rhymed once again as the index entered its greed phase in February 2013. It ended with gains of 90% by February 2015.

The next two years marked in red are the fear phase where the index lost 25% between February 2015 and 2017.

The challenging times for the sector are behind us. It has entered the greed phase in February 2017, and it could last till February 2019. If history is anything to go by, we can see the index moving up substantially from these levels.

The index has moved in a tight range over the last six months. It is trading close to its February 2017 level of 10,680 which means a bulk of its upmove is yet to come and this could be the best time to buy IT stocks.

Now let me be very clear. Best time does not mean that every stock in the IT sector will do well along with the index. You need to be very selective and chose the best ones with the most potential.

You need to time your entries and exits right. It goes without saying that you need to control risk and maintain a proper balance with rewards.

It would be great if you can do this all by yourself. But if you can't then you don't have to worry. We can help you out. Find out how!

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Market Notes

What Do We Need to Confirm an IT Sector Uptrend?

The IT sector has been under pressure for a long time. A few technical reasons are restricting the Nifty IT Index from trading in an uptrend. It has become quite difficult for the index to surpass the 11,000 level.

A few months back, we reviewed the Nifty IT Index chart in detail. It was trading in a downtrend (falling channel), widely underperforming the Nifty 50 index and lacking strength. It was the most 'hated' investment in the market as the H1B visa issue loomed over the entire sector. IT was in the news for all the wrong reasons. Which only made us even more interested in the sector.

Last time when we reviewed the sector, it was trading near the falling channel resistance line. The RSI indicator, which tells us about the strength of the trend, was finding resistance from 60 (a typical resistance in bear market). Basically, the index was trading weak. And we believed it would continue to trade weak unless we got a sustained breakout above the channel's resistance line.

Things have changed a bit now. The index has now broken the channel resistance line. But it has not made a new low since then. The RSI has not gone into its oversold territory and is finding ground from the typical bull market support of 40. This is a positive sign for the sector.

But it has also not started trading in an uptrend and the RSI is still finding resistance from 60 and has kept clear of the overbought territory.

Hated investments often take a lot longer than you expect to come around. And that's why you need to be very patient with them.

Now we know that prices usually move in a cyclic fashion. They rise, fall, and then rise again. These cycles have a proper structure. They go through four phases repeatedly: Accumulation, Mark-up, Distribution, and Mark-down. We call this the lifecycle of a stock.

The IT Index moved smoothly through the four phases - accumulation, uptrend, distribution, and downtrend - as you can see in the chart below.

Nifty IT Index in Accumulation Phase
Nifty IT Index in Accumulation Phase

The IT Index was in an uptrend in 2013 and 2014. It distributed for a year in 2015 and then traded in a downtrend in 2016. But it seems that the index is now in its accumulation phase. The accumulation has taken a form of an ascending triangle pattern. The breakout level of this pattern is at 11,000, which is also a horizontal resistance level (green horizontal line in the chart).

So, looking at the current situation, the negative news has calmed and we are now in the accumulation phase (which is followed by an uptrend), and the index has stopped making lower lows. Only thing that remains is to confirm the uptrend.

What do we need to get this confirmation?

  1. Price confirmation - A break out from the ascending triangle pattern and horizontal resistance line at 11,000. A price above this level will confirm a higher-top, higher-bottom pattern in the index.

  2. RSI indicator confirmation - RSI needs to break bear market resistance at 60 and enter the overbought territory of 70.

The above confirmation would end the accumulation phase and a new uptrend could begin soon. Watch the above parameters. If they start to fall into place, we might soon see a huge trend in the IT sector.

From the Market Wizards...

'Take your profits or someone else will take them for you.' - JJ Evans

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We request your view! Post a comment on "It's the Best Time to Buy IT Stocks". Click here!
6 Responses to "It's the Best Time to Buy IT Stocks"
d.shanmugasundaram
31 Aug, 2017
good article.Like 
bl saboo
22 Aug, 2017
it is advisable to go for infosys at current level, surrender against buy back , thus lower the cost for balance stock and watch for higher lev els to book profits as per ones apetite. other it stocks like eclerics, sqs bfsi, sonata alsi cheaply available. go for hunting. Like 
Ganesh
22 Aug, 2017
infosys can I buy.Because Buy back is announced by management current market price is 923 & Buy back is at 1150. Approx.Rs200/share is profit.Pl. advice.Like (1)
AMOL
22 Aug, 2017
Yes it's best time to buy IT STOCKS BUT SECLETIVE ONES ONLY . Debt free , dividend payers and long term value .TCS AND INFOSYS ARE TWINS OF IT SECTOR LIKE MARK WAIGH AND STEV WAUGH OF CRICKET TEAM. Short term problems are opportunities to buy theseLike 
vikas
22 Aug, 2017
Vipul, acceptance of the buy back will be less than 5%. You can only sell 5% of stocks you buy at buy back price..Like 
vipul
19 Aug, 2017
Infosis can I buy.Because Buy back is announced by management current market price is 923 & Buy back is at 1150. Approx.Rs200/share is profit.Pl. advice.Like (3)
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