Nifty IT’s rally contains the seeds of a decline

The Nifty IT index has been outperforming the benchmark Nifty50 by 9% since the beginning of the year. The out-performance, however, may not last going by the historical trend. The ratio of the Nifty50 and the Nifty IT indices, referred as the price ratio, is currently at 0.68 according to Bloomberg data. Historically a trend reversal has been observed at such levels. The seven-year average ratio was 0.78.

According to the mean reversion theory used in finance NSE 1.20 %, securities prices and historical returns eventually return to long-run mean. Neeraj Agarwal, vice-president, alternative research at IDFC Securities said that the under-performance of technology stocks cannot be ruled out in the near term as the price ratio tends to bounce up from the support level. “Any gain in the IT stocks from hereon should be used as an opportunity to exit out of technology stocks,” he added.

In the past four instances since 2015, whenever the price ratio dropped to 0.68, the Nifty IT index has lost 7.1% on average. Also, the lowest and the highest under-performance of the Nifty IT index against the Nifty 50 was 9.9% and 29.5%, respectively.

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