Does Investing in IT sector still make sense?

In the last two trading sessions, the Nifty IT index shed the gains made in the first week of October 2021. Read on to find whether it's time to shift your focus from the IT sector.

For the past two trading sessions, the Nifty IT index has been moving southwards, losing all the gains made in the first week of October 2021. However, weakness in the Nifty IT index is evitable since September 24, 2021, as indicated by the gravestone doji candlestick pattern. This is a bearish candlestick pattern signalling a reversal. With a formation of such a pattern, it is believed that one should book profits. The Nifty IT index has created a gravestone doji candlestick pattern on daily charts. (Refer to below chart)

Looking at other technical indicators such as RSI (Relative Strength Index), it is hovering around 50.55 level gliding down from 76.60 level at the end of September 2021. Also, the MACD (Moving Average Convergence Divergence) is supporting the short-term bearishness as it is moving downwards towards negative territory.

From the price action perspective, it is possibly making lower highs and lower lows. It made a low of 34,719.80 on October 1, 2021, and failed to break its all-time high level of 37,823.15, by making a lower high at 36,703.55 level. Having said that, we need to see two back-to-back lower high and lower low instances to assume trend reversal.

Speaking about valuation, the Nifty IT index seems to be quite heated. In order to understand the valuation, we took PE (Price to Earnings) data of the Nifty IT index.

The above graph clearly shows that the valuation is indeed quite overextended and might see some cooldown. Presently, the PE levels are trailing at 36.11, it is way above its 10-year average PE of 20.93. Not just that, but it has breached 3 times standard deviation mark.

The valuations and technical indicators are not welcoming. However, on the earnings front, we can see companies like Infosys and Wipro posting better numbers and beating estimates. Even their guidance is quite positive. Hence, we believe that investors should not rush to exit IT stocks. But at these levels, they can definitely book partial profits.