Monday, May 31, 2010

Sensex / NIFTY to see 20 % correction by mid July 2010

" History repeats itself - first as tragedy then as farce - Karl Marx"
Read an interesting piece - Technical history - on why US markets can fall 30-40% from their recent peaks.
US markets -S&P 500 is up 80% in just the past 12 months (from last year low on 9 March 2009 - 663 to 1220). And going back 80-90 years back, we have had just a couple of similar instances. What follows after that was a 30-40% correction.See details here
I tried to do a similar study for India `s Sensex / Nifty index and came up with similar findings. Just 4 instances in the last 17 years where we got at least a 70% rally in ~12 months and what followed was a 25 % correction on the average. Details as below.

Based on this ,we could have a 25% correction ( from the recent top of 18,000 Sensex and 5360 Nifty) by 13 July 2010, thereby giving targets of 13,500 and 4000 for Sensex / Nifty. ( I must add that I havent gone back beyond 1995 and back tested a larger sample of data,. But my reason  for taking  markets performance since 1995 is that FII investment picked up during those times  i.e post 1991.In case anyone can give a counter data going into say 50 years for Sensex ,please send it). 

In a typical bull market, getting a 10% correction - is quite rare and we get it on an average of one in every 11 months. So 20% corrections are much rarer in a bull market. But I am betting this is a trend reversal into a bear market and so we should see much deeper corrections than the usual 8% -10% ones.
The last week`s rally though surprising ( as Nifty crossed above 200 DMA of 5000 and is still above it) , does not impress me much. Unlike Indian Market ,we have not seen confirmation from other indices such as US S&P 500 close above its 200 DMA, even though its very close. Crude Oil too is below its 200 DMA. Indian markets have almost retraced 62% of their points lost in the past one month (thereby giving Resistance for NIFTY at 5100/5150) and similarly S&P 500 has retraced 38% of its lost points ( resistance at 1111). and I dont expect markets to make newer highs for 2010.

I can list down key fundamental reasons of why we would head lower 
  1. Global Government De leveraging cycle to pick up steam - This will manifest in terms of rising taxes of (all kinds on business such as mining and investment - capital gains tax) and rising supply of goverment owned entities to sell stake to the public from the Primary market
  2. Unwinding of a globally co-ordinated Govt. stimulus - would nip the nascent recovery in the bud for many developed economies.
  3. Sovereign debt crisis - we had Dubai last year and now it will be the Euro zone. Next usual suspects would be UK & US.
  4. Euro Dollar parity target- "Hedge funds career trade " to accelerate unwinding of the carry trade and will impact all kind of markets - stocks, bonds, commodities to a great extent,
The biggest factor that could support and take the markets to newer highs would be a second round of globally co ordinated govt. stimulus. Well the last time we had a stimulus was when Global markets fell 50% on the avg.-  so Bulls should expect things to get worse before betting for the "too big too fail" bailout trade by the Govt.
Disclosure : short Nifty and my earlier expectation of Nifty touching 4500 by Apr 2010 end -did not get hit. It only fell from 5200 to 4700 and then again rebounded to 5360.

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