When it comes to the Indian banking space, HDFC Bank is definitely 'the' favourite. Private banks are inspired by it and public banks idolise it. However, this does not make it infallible, and the spot at the top is not easy to maintain for a long time.
Many various factors can contribute to the downfall of a sector or industry leader, for example, change in macroeconomic factors, change in management, change in socio economic circumstances or simply the unfolding of a business cycle.
Drastic fall in Nifty 50 darling stocks seen rallying for many weeks and months at a stretch has been witnessed in the past. Unfortunately, they are not talked about as often as those 1 in 100 penny stocks which went from few rupees to thousands in a matter of months, giving rise to unnecessary sense urgency and risk appetite in unknowing retail investors.
I am talking about Maruti. Back in 2017, Maruti rallied as if it was on turbo. Forging new highs almost daily, everyone wanted to hold it in their portfolios. In the year 2017 alone, it rallied 88% in almost a one sided rally. Rewind one more year, from the last low point it had rallied nearly 214% from bottom to top in less than 2 years. No wonder the retail investor frenzy for it was uncontainable. A large cap stock delivering such insane returns was bound to catch investor attention like flys in a honey trap.
Trap it did. Soon enough in the beginning of 2018, the weekly charts of Maruti made a clear RSI negative divergence. The stock fell 35% in the very next year- 2018 and continues to fall since then, fueled by the COVID-19 headwinds and changing industrial dynamics.
From outperforming Nifty 50 by 150% between Feb 2016 to Dec 2017, Maruti went to under performing Nifty 50 by over 30% in 2018 and 2019 back to back. 2020 and 2021 were even worse.
Take a look at the weekly Maruti chart showing the RSI negative divergence and the subsequent fall all the way to the COVID-19 crash and failure to recover even though the broader market continued to rally without it.
So what does this have to do with HDFC BANK- India's darling Private bank and an idol for PSB?
A picture is worth a 1000 words. Below, you are looking at the weekly chart of HDFCBANK. A huge RSI negative divergence has unfolded the same way it has unfolded on the Maruti chart. It is also visible on the monthly chart and is a cause of worry, especially for retail investors. The frenzy for HDFCBANK seen today is no less than what was witnessed for Maruti back in 2017. Retail investors continue to add HDFCBANK to their portfolios quoting business channel anchor's saying 'Buy on dips'.
Such negative divergence is formed when there is strategic selling of a stock at the tops, by big cats without drawing attention. The media in the meanwhile continues to put out a positive narrative for these stocks already trading at their life time high, drawing more and more retail investors to take up positions. The recency bias being in full play.
But, these activities are never hidden from the momentum indicators like RSI which pick up on minor price movements and failure to sustain highs, building into negative divergences, indicating that the price high is not being matched with momentum and a slow down or reversal is just around the corner.
Ultimately when the broader market starts correcting, the retail investors is cut at the knee and left to bleed as these hollow rallies final stop and reverse.
We saw in the case of Maruti, nearly 60% correction from the top was witnessed over 2 years. As per my chart analysis, I still dont see a revival coming even over the next two years. Moreover, with the industrical landscape shifting from carbon based fuels to electronic vahicles and Maruti's clear lag in catching up, the stock's return to its 2017 highs seems very unlikely.
Similarly in HDFC Bank, while it stays ahead on innovation front, the recent change in management has sparked concerns. While nothing has been openly reported, there are increasing number of instances of the relationship managers being overworked, inefficiency creeping into the previously seamless system, prolonged response time and face-offs with regulators and more. These are early signs of an imminent loss of luster. I am not saying HDFCBANK will pull off a Lehman Brothers but it is definitely on the course to losing its top spot to other players like ICICIBANK and AXISBANK catching up to it faster than suspected currently.