Pair Strategy September 07, 2012
Long Dabur & Short ITC
Over the past six month, FMCG sector particularly ITC and HUL has
outperformed benchmark indices. In the initial part, rally in FMCG
had been limited to large cap companies. However, recently Mid-cap
companies such as Dabur and Marico has started to show positive
divergence vis-à-vis large cap. We believe this catch-up rally will
widen the historical price ratio between Dabur and ITC, from mean
to lower Band 2 at 1.90* (mean – 2nd standard deviation).
One year co-relation between Dabur and ITC is at 88% (strong
co-relation), while standard deviation at 0.111. We believe the
breakdown in historical price ratio from a six months support will
further drag the ratio lower.
We recommend traders to go long on Dabur (1 Lot September
futures) and short ITC (1 lot September futures) at price ratio of
2.04-2.05 with Stop loss placed at 2.12 for target of 1.90.
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