Pharma Stock Rally May Not Last In 2023 Despite Rise In Covid Cases

Rising covid cases in China have taken us down the darkest memory lanes of 2020 and we all know the pain of it.

The Indian share market is falling and is once again nervous.

After 2 years, covid is haunting us again with rising cases in China, South Korea, Australia, and many more countries.

The vaccines may play their role, but the fear is mounting and that fear may spread on Wall Street and D-Street.

The sell-off in the last couple of weeks was the impact of the fear leading to profit booking, especially because India was one of the outperforming indices in the world.

Back in 2020, when the market witnessed a V-shape recovery, the pharma index was one of the outperforming indexes. It's a no-brainer then that pharma sector stocks and diagnostic stocks would be the most beneficial sector globally.

Pharma stocks have started to rally again as there's a rush for medicines and hospitals with the rising cases globally. Back in 2020, people didn't know how to deal with the situation.

That's not the case now.

Can pharma stocks repeat 2020?

In 2020, the pharma index rallied by 60% and rest is the history. This year, the index is down 11% so far.

On 15 January 2021, I recorded a video highlighting “Time to Book Profits in Pharma Stocks” and the price movement was on similar lines to what I expected.

You can watch the video here.

As things stand now, the charts of the pharma index are just not looking exciting to predict the repeat of 2020.

After the rally in 2020, the charts highlighted an up thrust in January 2021.

An upthrust is the first sign of exhaustion as per the Wyckoff theory. This convinced me to record the video for my subscribers.

Though the index rallied 10% in the span of three quarters in 2021, the opportunity to mint money was in banking, auto and other sectors.

In October 2021, the fakeout of the distribution phase, as per Wyckoff's theory resulted in calling the top in the pharma index.

Since its high in October 2021, the index has corrected over 20% and is hovering in a broad range.

The reason I believe the rally may not be a repeat of 2020 is the lower highs on charts marked in red arrows. The lower highs don't confirm the bullish reversal. I will wait for the breach and close above 14,000 to change my view.

The ratio chart of Nifty Pharma / Nifty50 above indicates an underperformance of the pharma index over Nifty50. This is another reason to believe we are not seeing a repeat of 2020.

The breakdown of the support zone (black horizontal line) signals the pharma index may take months to outperform the Nifty50.

Additionally, the lower high – lower low bearish structure, as per the Dow Theory, is convincing me of the underperformance of the pharma index.

As a trader, you may find a few stocks with 8-10% moves in the pharma basket but for investors, it doesn't seem the place to be invested.

Things may change on the charts if the covid cases rise but I will wait for the confirmation on the chart. It is better to buy pharma stocks when there's momentum rather than sit on the dead stocks.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com