IT Stocks Can’t Trump Fear: Traders Build Bearish Bets
The information technology (IT) sector is under the microscope as traders increasingly shift towards bearish derivative positions. This cautious stance comes ahead of the third-quarter results and following several ratings downgrades, impacting market sentiment.
Market Overview
– NSE IT Index Performance: The NSE’s IT index dipped by 1.4% at the close of trading.
– Stock Movements: Nine out of ten IT stocks fell between 0.4% and 2.2%. The only exception was LTI Mindtree, which recorded a modest gain of 0.13%.
Factors Driving Bearish Sentiment
– Short Buildup:
– Traders, according to Vipin Kumar, AVP of derivatives and technical research at Globe Capital Market, saw a notable short buildup in major companies such as TCS, Infosys, Wipro, HCL Tech, and Tech Mahindra, with increases in open interest ranging from 3% to 6%.
– In the mid-cap segment, LTIMindtree and KPIT Technologies experienced an approximately 10% rise in short positions.
– Brokerage Downgrades:
– CLSA downgraded HCL Technologies and Tech Mahindra, while Citi pointed out a slow and uneven recovery for the sector.
– Traders remain cautious on IT stocks ahead of earnings, exacerbated by multiple broker downgrades, noted Sagar Shetty, a research analyst at StoxBox.
Q3 Sentiment and Economic Concerns
– Typical Q3 Challenges: Analysts suggest that the third quarter often sees softer performance, exacerbated by fewer working days, seasonal furloughs, slower deal conversions, and delayed budget renewals from clients.
– Geopolitical Factors: Concerns intensified following comments from Donald Trump about possible new tariffs on India, raising fears about potential impacts on the IT sector.
Performance Metrics
– Yearly Trends: Over the past year, IT stocks have underperformed the benchmark Nifty index, with the Nifty IT index down over 14% compared to a 9.1% rise in the Nifty.
– Recent Recovery: Despite this, the IT index has bounced back with an 11.1% gain over the last three months as investors spotted value amidst the downturn.
Analyst Recommendations
– CLSA analysts foresee significant upside for companies like Persistent Systems, Coforge, and LTI Mindtree due to reliable management execution.
– For large-cap stocks, Tech Mahindra and Infosys are favored over HCL Technologies and Wipro. Analysts suggest that TCS must focus on improving earnings growth to regain market share.
– Long-term Outlook:
– Sumit Pokharna from Kotak Securities highlights a long-term bullish perspective on Tech Mahindra, Coforge, and TCS while urging caution for short-term positions amid geopolitical uncertainties.
– Analysts like Shetty recommend exposure to IT stocks only for long-term investors, emphasizing the need to monitor management insights and AI investment strategies closely.
In conclusion, while the IT sector faces considerable challenges, the potential for recovery hinges on key economic indicators and management performance. As traders build bearish bets, the coming earnings reports will be critical in shaping future sentiment in the IT stocks landscape.