Written for Business Standard
November 17, 2011: Over the past six months additional sectors were sucked into bear territory as the downtrend in the equity markets continue at a slow but steady pace.

The neutral sector is Healthcare and the bullish sector is FMCG. The sectors that turned bearish from neutral are consumer durables, IT, Metals, and Oil & Gas. The increased bearishness does not augur well for the stock market bulls or the economy. So far the fall has been slow and steady, which is both good and bad. The good part is that there has been no panic selling in the market like in 2008. But the bad part is that a market that falls slowly also goes up slowly. However, if there is a global shock the Indian markets can fall fast as there is not much in the way of support on the charts of several sectors.

The methodology

To identify bullish and bearish sectors we have used the methodology of dividing market trends into four stages as espoused by the famous market technician and author Stan Weinstein. Over the long term, the markets tend to move in four stages-- market bottom, rally, market top and sell off. Generally markets tend to move sideways in the bottom and top phases, but sometimes they may not. For instance in the March 2009 bottom both the Indian and US markets did not consolidate and rally, but made a "V" shaped bottom and rallied strongly.

The charts clearly show that the Sensex, NIFTY and most sectors have moved well into fourth stage. This is not only shown by price, but the 30-week simple moving average (SMA), which is a crucial tool used by investors form a bullish or bearish bias, when trading the four stages of the market.

To form a bearish bias the market has to:

• Move sideways after a rally
• Fall below the lowest price point in the sideways rally
• Trade below the 30-week SMA
• and finally the 30-week SMA must slope down

The reverse is true form a bullish bias.

Broad markets bearish

Both the Sensex and Nifty have been bearish for quite sometime after peaking in November of last year and exiting the third stage. The prices of both broad market indexes are below the 30-week moving average and the average is sloping down. Interestingly a look at both charts (links in table below) shows that the 30-week moving average is now acting as resistance. Each time the indexes rally to their 30 week moving average, they sell off. 

The table below gives the status of the index and sectors in the Indian economy and provides links to the chart. The blue line on the  charts is the 30-week SMA:

 Trading Strategy

With most sectors bearish it's best to wait for rallies to short into. Prices rallying to the 30-week moving average is generally considered a nice place to short. However, one should also makes sure that prices fell from that level earlier. The only sector to be bullish about is FMCG. However, given the strong bearish bias in most sectors it's best to avoid this sector as it can turn at any time. Also since the sector is still bullish, it's not advisable to short it.  Since most of the sector indexes are not traded on the futures market, one should look for bearish stocks within the sectors to short.