Is it time to shrug allocation in the IT sector?

In the last two trading sessions, the Nifty IT index snapped the gains made in the first week of October 2021. Is time to shift your focus? Let’s find out.

The Nifty IT index has been moving southwards for the past two trading sessions. Having said that, the gains made in the first week of October 2021 went in vain. The Nifty IT index saw the first sign of weakness on September 24, 2021, by forming a gravestone Doji candlestick pattern.

Gravestone Doji is a bearish candlestick pattern. This pattern suggests a reversal followed by a downtrend. Usually, this pattern is a sign to take profits on a bullish position. The Nifty IT index has created a gravestone Doji candlestick pattern on daily charts.

Moreover, RSI (Relative Strength Index) is at 50.55 slashed down from 76.60 at the end of September 2021. Also, the MACD (Moving Average Convergence Divergence) is swiftly moving downwards towards negative territory. 

Looking at price action, post making a low of 34,719.80 on October 1, 2021, it failed to break its all-time high level of 37,823.15 and instead made a lower high at 36,703.55 level. So purely from a technical perspective, IT index looks exhausted as of now.

Even on the valuation front, the Nifty IT index seems to be quite stretched. To understand the valuation, we took PE (Price to Earnings) data of the Nifty IT index.

The valuation is indeed quite heated and may cooldown. At the current trailing PE level of 36.11, it is way above its 10-year average PE of 20.93. In fact, it's even above the 3 times standard deviation. The valuations and technical indicators do not paint rosy picture about the index. However, result of IT major, Infosys, and Wipro, having a weightage of more than 33 % in IT index has come out with good numbers. Hence, it is better to stay put as of now.