The Sector Dilution

I was recently asked a query whether LinkedIn IPO success had some sentiment cues. This is what I had to say “Demarcations get weaker between Technology and retail consumption when we talk about social networks. These networks are here to stay and maybe become more like staple than discretionary.“
From an intermarket perspective we always had the conglomerates tougher to analyze, which sector they belonged too and how they were going to witness sector rotation. Now I think these social network IPO’s thin the line further between what’s Information Technology and what’s staple. If the “knowledge worker” uses social networks as way to communicate and internet connectivity becomes as important as the food we eat, how far is the new IT from staples?
Well these are the questions I am asking. Maybe John Murphy and Sam Stovall have the answers. But for me classic conventional sector rotation is facing a challenge.
Coming back to something more conventional, the chart below is the Nifty plotted along with the relative performance ratio line between Nifty vs. CNXIT. Whenever CNXIT underperformed NIFTY and hit the primary trendline support, NIFTY rose. Though at this point the ratio line is pointing lower, it would be good to see how the previous primary trendline supports would behave this time. Will the trendline supports push NIFTY up again or will the trendline break?
If the trendline breaks, Nifty will also break down and head to 5,000. There is another pattern that we see here. The relative performance ratio line makes a classic head and shoulder in time. First we had a 2 yr cycle (shoulder), followed by a 3 yr larger cycle (head). Now a 2 yr cycle (shoulder) takes us well into the end of 2011. Even the most conservative estimated suggest that even if the primary trendline does not break we should see CNXIT outperforming NIFTY well into Q3. This is not very good news for the market, from what has happened historically.
Our preferred view remains negative. IPO success and renewed confidence sets us up better for a bull trap going ahead (At least for intermediary time frame). We are still primary bulls. Let’s see if the above conventional intermarket relationship works.
This article was written for ATMA.

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Coverage India: CNX100 traded stocks and Indian Indices.
Michesan Anna-Maria, Head of India Research. Anna discovered her interest of markets immediately after completing her graduate studies in Economics. She followed it up with post graduate studies in corporate finance. A host of research work in behavioral finance, option strategies and quantifying market sentiment followed. Anna covers Indian equity and combines Elliott, Time Fractals and Time Analytics to deliver accuracy across time frames. To review some of her work, check out the annual India accuracy report 2009.