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Indian share markets have been defying gravity in the past eighteen months.

The BSE Sensex has crossed the 60,000 mark. The Nifty too has been riding the bullish wave and traders expect it to cross the milestone of 18,000 soon.

But with looming risks such as earnings disappointments rich valuations, and talk of the market being in a bubble, one can only wonder…

Is the market is overbought? And how can you really tell?

Enter the RSI (Relative Strength Index).

Created by Welles Wilder, the RSI tells us if an index or a stock is overbought or oversold.

This technical indicator has a reading from 0 to 100. If the RSI is 70 or higher, the security is overbought. If the RSI falls to 30 or below, it’s oversold.

It’s really that simple.

So, which are the top 5 stocks on the Nifty 50 that are overbought?

#1 Coal India

Coal India is the most overbought stock on the Nifty at the moment with an RSI of 81.6.

The stock has been in favour with investors after the company announced it will ramp up supplies to power companies, to boost their depleting stocks of coal.

Power demand has seen a robust recovery, led by staggering rainfall, rising temperatures, and an economic recovery after the second wave of Covid-19, contributing to low coal stock at plants.

In the last three days, Coal India has increased the supply to power plants to 1.4 MT (million tonnes) daily.

From October onwards, the company aims to ramp up coal supply to power plants at 1.5 MT per day. The coal supply will reach 1.6 MT per day by the end of the month.

The company might also raise prices of dry fuel by at least 10-11% to mitigate the impact of increased costs and an impending wage revision.

It had last hiked coal prices in 2018. Its current average regulated price realisation is 1,394 per tonne.

Meanwhile, the company’s subsidiary Northern Coalfields (NCL) has joined hands with NTPC to install a 50 MW solar power project in Madhya Pradesh.

Coal India reported a 52% YoY increase in net profit at 31.7 bn in its latest quarterly results.

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#2 ONGC

Next on the list is ONGC with an RSI of 79.8.

The stock has been in focus over the last few days as the price of domestic-produced natural gas has been hiked by 62% to US$2.9 per MMBtu (million British thermal units). This price is for the October 2021-March 2022 period.

The ceiling price of natural gas produced from difficult discoveries has also been hiked to US$6.1 per MMBtu.

The hikes follow an increase in gas prices globally that dictate domestic rates. A further hike in domestic gas prices is expected in the next revision in April 2022.

An upward revision in domestic gas price is a positive for ONGC as a hike of US$1 per MMBtu will boost its net profit by 14.5% annually.

Meanwhile, ONGC Videsh (OVL), the overseas arm of ONGC, drilled its first well in Bangladesh.

This well marks the beginning of exploratory drilling in Bangladesh and will be followed by drilling at two more exploratory locations.

For the June 2021 quarter, ONGC’s net profit soared by nearly 800% YoY as oil prices doubled.

 

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#3 NTPC

Not far behind ONGC is NTPC with an RSI of 77.6.

The company has been on the radar of investors in the last couple of days for a variety of reasons.

First, as per analyst reports, demand in the power sector is expected to improve in the financial year 2022 with higher levels of economic activity.

The growth in demand augurs well for the company. This coupled with the government’s ‘Atmanirbhar Bharat’ initiative indicates huge future potential.

Second, NTPC has said it received approval from its shareholders to raise up to 180 bn through the issuance of bonds or debentures.

In addition to capital expenditure (capex) requirements, the company needs the money for working capital and other general corporate purposes. It had also sought shareholders' approval to increase its borrowing powers from 2 tn to 2.25 tn.

Third, the company’s subsidiary, NTPC Renewable Energy (REL) has signed its first green term loan agreement for 5 bn. The loan is for a 470 MW (megawatt) solar project in Rajasthan and a 200 MW project in Gujarat.

NTPC had set up the subsidiary for its renewable energy projects in October 2020. The management has said the company will list the entity soon. NTPC has also revised its renewable energy target to 60 GW from 30 GW by 2030.

It reported a 17% year on year increase in net profit for the June 2021 quarter on the back of a rise in revenue.

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#4 Titan

The stock of jewellery company Titan is fourth on the list with an RSI of 76.4.

Shares of the company have rallied nearly 10% in the last month. It has seen increasing investor interest following expectations of a strong demand recovery in the near term.

According to industry estimates, Titan's market share in the jewellery segment is still below 10% despite rapid growth in the past few years.

This is likely to improve since mandatory hallmarking as announced by the Government will increase operating costs. This will make it difficult for smaller unorganised jewellers to be competitive.

Currently, unorganised jewellers account for nearly 67% of the total market.

Titan’s revenue growth in the next couple of years is expected to be driven by the company’s jewellery division through gains in market share from the unorganised players and aggressive store expansion.

The company has already doubled the store count under its jewellery brand Tanishq in the past seven years with major additions since 2018.

Most of these outlets are franchisee-operated, which improves Titan’s capital efficiency.

For the June 2021 quarter, the company’s revenue grew by 75% YoY. It also reported a net profit of 180 m against a loss in the year-ago period.

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#5 Indian Oil Corporation

Last on the list is Indian Oil Corporation (IOC) with an RSI of 74.3.

Shares of the company have been in focus after the company’s chairman said India may need an additional 2 m barrels per day (bpd) in refining capacity by 2030.

India is the world's third-biggest oil importer and consumer and currently has 5 m bpd of refining capacity. IOC controls around a third of that capacity.

The chairman added that there could be a dip in fossil fuel demand in the next two to three decades as the country moves to cleaner fuels.

To de-risk its core refining business, Indian Oil plans to boost the output of petrochemicals besides raising the use of green energy.

The company has started working with its subsidiary, Chennai Petroleum Corporation (CPCL), on a 315.8 bn refinery project at Nagapattinam in Tamil Nadu. Both companies will hold 25% each in the proposed 9 MTPA (million tonnes per annum) refinery. The remaining 50% will be held by a strategic or financial partner.

The financial closure of the project is expected to be achieved within six months. The project is expected to be completed between 45-50 months once work starts.

In its latest quarterly results, IOC reported a three-fold jump in net profit on inventory gains and higher petrochemical margins.

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Are PSUs making a comeback?

As you can see, four out of five stocks on this list are PSUs (public sector undertaking).

The reason is that many of the segments PSUs operate in, such as oil and power, are witnessing a strong demand.

These companies have also improved their balance sheets by deleveraging in a very focussed way.

As a result, they seem to be in a position to cash in on the improved outlook we are likely to see once the economic momentum comes back.

Limitations of RSI

Like most investing tools, the RSI has its limitations.

The indicator is less effective if the stock remains overbought for a long period without reversing.

This can happen as sometimes certain stocks can remain overbought (at 80 or 90) not for days or weeks, but for months.

Also, like many indicators, RSI is not as successful in a low-volatile market environment. It gives false negatives and false positives.

The answer is to combine RSI with other indicators. This can help cut down your margin of error. In other words, don’t trade unless you can confirm the RSI with other indicators (such as moving averages or MACD).

However, the RSI usually generates reliable signals, especially on weekly charts. Although not perfect, one should not ignore or dismiss it.

This article is syndicated from Equitymaster.com

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