• : June 9, 2018
  • : B. Krishnakumar
The stocks from the pharma sector have been buzzing around recently with a few stocks regstering sharp gains. The pharma sector stocks were among the top performers until 2015 and have since been underperforming the Nifty 50 index. The recent rally has begets the question: Has the sector bottomed out and is it time to invest in Pharma sector?

Let's try to address this question via a few charts. We shall begin with the Relative Stregnth chart of Nifty Pharma index versus the Nifty 50 index.
Pharma RS Chart

It is apparent from the above chart that the bearish sequence of lower highs and lower lows is intact. This indicates that the Pharma sector is still underperforming the Nifty 50 index. Typically, I prefer a failure of prior bearish pattern to indicate a possible trend reversal. In this chart, the level comes in at 851 while the current price of the relative strength chart is at 800.

Have a look at the Relative Strength Matrix table of NSE sectoral index versus the Nifty 50. (Right Click on the image and open it in a new tab to get an enlarged and clear image)

Nifty sectoral index

The performance score of 2 in the 0.25% box size indicates that there are some early signs of improvement in the relative performance. But, the score is still -2 in higher box size of 2% & 3% indicating that the undperformance cycle is still in force in the higher time frame (higher box size is proxy for higher time frame). It makes sense to wait for the recent recovery to sustain in the following weeks and months so that the score turns positive in the higher box sizes as well.

Here is the daily chart of the Nifty Pharma index using the 0.25% box size.

Nifty Pharma index

Here again, the bearish sequence of lower highs and lower lows is still prevalent. A breakout above 9,080 will not only break this sequence of lower tops and bottom, it would also result in a failure of the prior Bull-Trap pattern. I prefer to wait for a failure of prior pattern as a strong confirmatory sign of trend reversal. You can also view the video on Pattern Failure in the members section of ths site.

Here is the relative performance matrix of pharma stocks versus Nifty 50. (Right Click on the image and open it in a new tab to get an enlarged and clear image)

Pharma stocks

Sun Pharma and Glenmark top the list at the moment. The early outperformers tend to do well as and when the sector gets into a bullish phase. So, have the list of relative outperformers handy so that it becomes easy to focus on the right stocks when the sector does eventually get into a bullish mode.

To sum up, I am not bullish yet on the pharma sector even though there are early positive signs. As mentioned earier, I prefer a breakout above 9,080 before comitting funds in the pharma sector stocks. This is a reactionary style of analysis which results in a delayed entry in comparison to an anticipatory style. Am willing to live with this trade-off of delayed entry.