Bank Nifty: Key technical indicator hints bank stocks in a long-term bear phase

Mumbai: Most of the listed banks are trading below a widelywatched long-term average, indicating the underlying weakness in the sector which is plagued by bad loans, and now, multi-crore frauds. Data show that 31 of the 39 listed banks are below the 200-day moving average and 11 of the 12 Nifty PSU bank index constituents are below their 200-DMA. If a stock or an index falls below 200-DMA, it means the stock or the index is in a long-term bear phase.

Bank of Maharashtra, Dhanlaxmi Bank, Dena Bank, Allahabad Bank and Punjab National Bank are 27-36 per cent below their 200-DMA levels.

The 200-DMA is a long-term average and is considered a major support level. There are roughly 200 trading days in a year after deducting holidays and weekends so essentially the 200-DMA gives the yearly trend.

Analysts said recent changes in RBI regulations could precipitate NPA recognition and therefore, continue to put further pressure on banking stocks. Moreover, the unearthing of the Rs 11,400-crore fraud at Punjab National Bank has led to renewed concerns over the health of the banking system.

“Both the factors will have some impact. The PNB issue brings into question the entire regulatory framework in which the banking sector operates. In terms of what the RBI has done, it is a right strategy in the long term, but in the short term it could lead to an increase in provisions and higher level of NPAs,” said Vinay Khattar, head of research at Edelweiss Securities.

“More weakness will play out in the near term,” added Khattar.

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The Bank Nifty ended down 0.7 per cent at 24,874.40, and has lost 2.2 per cent in the last three sessions. The index is down 2.6 per cent for the calendar year. The Nifty PSU Bank index ended up 0.8 per cent at 3,136.55 after losing 11.7 per cent in the previous six trading session. The PSU Bank index is down 15.2 per cent so far in 2018.

Experts warn that the extended period of weakness could lead to funds reducing weightage.

“A lot of funds use the 200-DMA as an indicator of whether the long -term trend is up or down. Funds tend to reduce weightage in such sectors,” said Rohit Srivastava, fund manager at Sharekhan & BNP Paribas.

Srivastava said PSU banks will continue to be weak as they are in a downward trend.

Dhananjay Sinha, head of research at Emkay Global Financial Services, said the trend continues to be in favour of private banks over the public sector lenders.

“In the banking sector, we favour banks which will gain market share on a structural basis. Private sector banks will succeed in that case,” said Sinha.

Bear snip