The second half of 2006 was quite interesting. The Sensex continued to hit new highs with amazing regularity, yet investors' portfolios didn't appreciate that much. It was just a handful of seven heavyweight stocks which kept the index going while the rest of the market hardly participated. These seven : Infosys, TCS, Bharti, SBI, ICICI, RIL and Reliance Communications account for nearly 50 per cent of the total weightage of the Sensex. The answer to where the index may bottom out and whether it can reclaim its lost ground rests squarely on the shoulders of these Seven Samurai.
SBI is down 40 per cent from recent highs and ICICI 20 per cent. To expect them to carry the Sensex in a high interest rate environment may be optimistic. The outlook for Infy and TCS will be shaped next week depending on Infy's FY08 guidance. The market is not very hopeful. Telecom has been one of the strongest sectors. While the outlook continues to be strong, some cracks have opened up recently in RCom. It would be interesting to see whether valuations contract in this sector. Finally, there is the big boy, Reliance. So far it has withstood the fall. This is the rock the market is leaning on. If RIL cracks the market may lose its footing. Indeed, if the outperformance of these seven stocks begins to unravel, the Sensex will come under a lot of pressure.
These stocks are even more important as there aren't many others which can assume the mantle of leadership. Either their weightages are not significant enough or the fundamentals are murky. Yes, there is the odd ONGC but that is linked to the ever-so-volatile crude oil market. ITC is a heavyweight but it is labouring under the value-added tax (VAT). Sectors like oil and cement remain under government interference, and pharma isn't big enough. It has to be the Seven Samurai again. They will make or break the next move.