Rally in midcaps at early stage of uptrend, 30% upside possible: ICICI Securities

ICICI Securities

The sharp rally over the past couple of weeks has taken many by surprise. Investors have been left wondering if the rally has further legs or whether this should be viewed as an exit opportunity, especially in the beaten down midcap and smallcap space?

We do not foresee midcap and smallcap indices to challenge February lows as the current rally is at the early stage of a major uptrend. We recommend investors to start accumulating quality midcap stocks to ride the next leg of a major up move (around 30 percent from hereon). We expect bouts of volatility to persist in the run-up to the general election 2019 that should be capitalised as an incremental buying opportunity.

We focus on examining the market internals of the ongoing rally in midcap and small-cap stocks, drawing inferences from prevailing time cycles to ascertain the future course for the rest of 2019. Our thesis is corroborated by following findings:

related news Why Dish TV, BPCL and Power Grid are a buy What to keep in mind when rebalancing your portfolio? 'Expect huge short covering in next 10 days, buy every decline'

• Since its inception in 2003, all three major corrections (2008, 2011 and 2015) in Nifty Midcap index, have matured in 14 months, followed by average minimum returns of 40 percent, in the following year. In the previous three instances, Nifty midcap index had rallied 169 percent, 41 percent and 48 percent on completion of the 14-month cycle. Although the Nifty Midcap index has already rallied 12 percent from February 2019 low (16,045), at least another 30 percent rally is ahead of us.

• Noteworthy simultaneous improvement in twin breadth indicators, confirm maturity of 14-month down cycle, similar to the past three instances
a) percentage of stocks above 200-DMA reversing above 50, after falling below 20

b) advance-decline summation index reversing to positive zone after recording extreme bearish set-up

Here are five midcap picks that could return more than 20%:

Ipca Laboratories | Target: Rs 1,080 | Stop loss: Rs 758

> Breakout from a five-year consolidation signals a structural turnaround
> A faster retracement as 14 quarters decline (Rs 906-400) is completely retraced in just six quarters

> We expect the stock to continue its current up move and test levels of Rs 1,090 as it is the 138.6 percent external retracement of the entire previous decline (Rs 907 to Rs 400)

Kansai Nerolac Paints | Target: Rs 550 | Stop loss: Rs 405

> At the cusp of a falling channel breakout containing entire decline since high of Dec'17 (Rs 614)
> A slower retracement as the stock has already taken 14 months to retrace just 80 percent of the previous 12 months' up move from Rs 319 to Rs 614

> The favourable risk-reward set-up offers a fresh entry opportunity for upside toward Rs 560 as it is 80 percent retracement of the entire decline (Rs 614 to Rs 343)

NBCC India | Target: Rs 80 | Stop loss: Rs 56

> Double bottom breakout aided stock to resolve out of long-term falling trendline to longest pullback since November 2017 along with a faster retracement as six weeks decline (Rs 63-47) has been completely retraced in four weeks

> We expect the stock to resolve higher towards August 2018 high Rs 80 as it is the 61.8 percent retracement of the last decline (Rs 109 to Rs 47)

Bank of India | Target: Rs 110 | Stop loss: Rs 83

> The stock has been forming a base at key support zone of Rs 80 as on multiple occasions it respected May 2005 lows (Rs 80)
> Monthly RSI recorded a bullish crossover after witnessing a positive divergence

> We expect the stock to continue its current up move and test Rs 110 as it the high of January 2019 and 80 percent retirement of the previous major decline (Rs 119 to Rs 73)

Lux Industries | Target: Rs 1,560 | Stop loss: Rs 1,152

> Breakout from a major falling channel contains the entire corrective decline
> The stock in March rebounded from the major support area of Rs 1,100 as it is the major trendline support joining the lows of CY2016 (Rs 576) and CY2017 (Rs 650)

> The current improvement in price structure signals resumption of up move and open upside towards Rs 1,570 as it is 50 percent retracement of the entire decline (Rs 2,094-1,055).

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. First Published on Mar 18, 2019 01:53 pm