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While the broader markets remained in a seesaw mode throughout the trading session on Thursday, investors seemed to be confident with their bet on ICICI Lombard General Insurance Company Limited (NS:) (ICICIGI). The entire insurance space should be watched closely as most of the counters are witnessing breakouts, which might have something to do with the upcoming Budget of 2023.
After analyzing a couple of insurance stocks this week, ICICIGI is another one that seems all set to make a move. It is a general insurance company with a market capitalization of INR 61,336 crores and trades at a P/E ratio of 48.26 which is an eye-catchy valuation as most of the peers are trading with a P/E ratio of over 80, with New India Assurance Company being the most expensive one, at a P/E of 116.81.
Image Description: Daily chart of ICICIGI with volume bars at the bottom
Image Source: Investing.com
Coming back to ICICIGI, the stock had been consolidating in a narrow range for the last one month. The range was extremely narrow which reflected the volatility contraction in the stock to a great extent. This suppressed volatility can also be gauged by using Bollinger Bands® on the daily chart. These bands expand and contract, in sync with the volatility levels of the underlying security.
As you can see, these bands squeezed quite a lot during the stock’s sideways move which was an indication that the stock is ready to break free from this range. This can be concluded by the mean reversion property of volatility which means that it reverts from high to low and vice versa, and is not generally trending by nature. Hence, whenever a stock portrays a volatility contraction for a long time, investors can expect a good move in the near future, although, the direction is difficult to be estimated beforehand.
As this range had been breached on 3 January 2023, followed by a profit-booking day and again a follow-up rally today, the trend finally seems to be developing on the upside. The good part is, there is no resistance present nearby, which could give the rally its own room to take the stock to higher levels.
On the upside, the nearest hurdle is present at around INR 1,400, giving the stock a decent upside potential of INR 120 from the CMP. On the lower side, closing below the support of INR 1,210 would be a confirming signal for the breakout failure.
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