Will Pharma lead the next bull run ?

From stock market participants, currently there are 2 million dollar questions:

1. Where will the market bottom ?
2. Which sector will be leader of next bull run ?

I have already covered the first one in my earlier blog post. You can read the same here.

Now lets try to find out the leader of next bull market. What are few traits which one can look at while identifying a leader ?

1. Sector should be under owned
2. Price action should display leadership

Lot many try to focus on fundamentals which at bottom will always be negative. Always remember: "Price follows first, reasons follow later"

Looking at these traits, one sector which seems poised for a bull run is Pharma sector.

Let us try to analyze the reasons one by one:

CNX Pharma index: This is the sector index for Pharma. Look at the weekly chart. This sector was in a bull run since 2009 and topped out in 2015. Since then it has been in a bear market for 5 years and has seen multiple rallies only to make a new low each time. This is a typical Lower High Lower Low pattern exhibited in a bear market. What does it do ? Each time folks see a rally, they try to get expecting resumption of a bull market only to be disappointed each time. What happens when such an event plays out over 5 years period ? People get fed up. This leads to under ownership of the sector. You would hardly see new funds being launched by AMC's which also signify that there is serious lack of interest. Nifty pharma weightage in Nifty is 2% compared to 36% for Financials !! This all points out to under ownership of the sector.

CNX Pharma

Look at how the price has been correcting below this sloping trendline. A close above this line will also lead to break in Lower high Lower low pattern thus indicating end of bear market. Currently entire world is focusing on de-risking from China and Indian pharma would be a major beneficiary of this move.

Now whenever a sector which has seen a bear market for 5 years starts rising, one thing we see is the old leader get selling pressure a higher levels. Why ? There are many so called long term investors who are stuck at higher levels and are holding these stocks waiting for a day they can get out once their investment breaks even (they hate getting out at a loss without realizing that they have faced huge losses on account of opportunity cost) . Due to this there is a strong possibility of new leader emerging in this sector and old leader under-performing. How do I know ? Well the price actions is saying so.

How do you identify leadership ? Best way in my opinion is to look at stocks which don't significantly correct in bear market and lead the charge during bounce back.

Few leader below looking at price action. (comments are present on chart)

Torrent Pharma

Biocon

Divis

IPCA Labs

Granules

Now lets look at some of the old leader and you can see why chances of these giving multibagger returns are less. Of the lot I find Dr Reddys to be the strongest which has clearly bottomed out. The other are yet to establish a clear trend

Dr Reddy's

Sun Pharma

Cadila

Cipla

I think the key to make money here is to look at how these stocks react when the market corrects again and when there is a rebound. For those who don't want to be stock specific, buying a pharma fund or a basket of above stocks is also a good idea.

Disclosure: I am not a SEBI registered investment advisor. The content in this blog are academic in nature, please consult your investment advisor before taking any investment decision; I may have position in stocks discussed on the blog