Monday, January 23, 2012

India NIFTY - resumption of bull market or another bear market rally ?

Global Macro check.

India NIFTY @ 5048. or +11%  rally from recent low of ~4500 made on 20 Dec 2011.
Even beaten down India stocks have ralled +30%-+50% in past 3 weeks.
Other countries such as Brazil, DAX,Hang Seng,even Italy have rallied +20% to +28% from ~3 month lows ?
So does all this indicate an early uptrend or another bear market rally ? I would go with the latter. Details below
One needs to keep in mind that most sharp +20 to +30% rallies in short periods of 2-3 months are seen in bear markets. But at the same time,one should always be open to new information and keep on evaluating if the trend has reversed.
I see current situation similar to in Oct`2011. Refer / rewind to my then trading outlook post here.
Rewind to that month. EURUSD was then at 1.42 above 200 DMA.
Many stock indices such as DAX had rallied +20%-25%.
NIFTY also had broken its multi-month trading range of 4800 to 5200 on the upside and rallied to 5360. NIFTY 200 DMA was just 50 points away. I had loaded up with my biggest ever NIFTY calls. But then overnight Japan intervened in the currency market to stop the strenthening YEN vs USD. USDJPY was up 4.5% intraday.!!. US Dollar then again continued its uptrend. I squared off all my NIFTY calls at market open and escaped luckily but didnt hesitate to change to short future positions in next 5 minutes.

Study Approach
  • I have compared Stock Indices of  G7 countries - US S&P 500, FTSE, Germany DAX,France CAC 40,Italy MIB 40
  • Hong Kong `s Hang Seng. 
  • EM`s - Brazil Bovespa, Russia Micex,China Shanghai Composite and India NIFTY / Sensex.
  • Copper and Brent Oil
  • EURUSD and risk currency AUDUSD.
Summary results for the above is in a table at the end of this post. So please scroll to the bottom to skip the narration below.


Summary
  • For most markets, low was made in ~ 3 Oct 2011 when EURUSD fell to 1.315.
  • Among G7, DAX has rallied the most +26% ( from the recent ~3 month low), US S&P 500 is 2nd at +20%
  • Hang Seng has rallied +24%
  • Among EM`s - Brazil is up +28%, Russia 20%. India and China are still the laggards with rallies of +11% and +8%.
  • Copper is up +25%
  • AUDUSD is up +11% but EURUSD just up +1.8%
  • All EOD ,market close data taken.
My view
  • Inspite of no clear resolution to Greece, it is surprising to see these market rallies. So credit have to be given to the bulls.  Eg.S&P500 is already above 200 DMA since past 3 weeks. ( since 30 Dec 2011).Even Euro countries - DAX,France,Italy have also rallied +20-26%. But then this is not followed through by EURUSD rally . So a divergence here.
  • Overall I still believe that we are still in a bear market and I see further upsides capped of 3-5% vs downside of  ~10% for countries that have rallied the most.
  • Most markets are at critical juncture, with rewards to risk ratio definitely not in favor of further upside.
My NIFTY View
  • A good case can be made for laggards India and China to play catch up with other countries. But like last time in Oct`11,by the time India could catch up, the global rally had already reversed. So I would be skeptical of further 10% rally for NIFTY with likely top at 5200 - 5300.
  • Further details on past bear market rallies in 2008 shows that India Bear market rallies top out at  +13% - 14% i.e NIFTY top at 5130 - 5200 from 20 Dec 2011 low of 4544:-
    • +14% rally from 19-Mar-08,NIFTY @  4573 to 2-May-08,5228.
    • + 13% rally  from 4-Jul-08,NIFTY @ 4016 to 8-Aug-08,4529
    • +13.4% rally from 5-Dec-08,NIFTY @ 2714 to 19-Dec-08,3077
  • In case global markets supports, a catchup +20% rally would lead NIFTY to touch 5450. i.e another +9% rally from here. i.e possible but not probable in my view.
  • Price wise,we have seen close to median damage in a bear market of -25% NIFTY / Sensex correction,with the average stock seeing a 30-40% correction. But question is - time-wise, have we reached the bottom ? Current downtrend has lasted for ~14 months vs median ~18 months.
  • 5200 to 5360 zone would be big resistance zone. Reasons
    • NIFTY is still below is longer term trend of 55 weeks DMA.This has been a great support from 2003-2007. Today NIFTY at 5048 is still below its 55 weeks DMA level is 5310.We`ve had some false breakouts that lasted just 1 month above 55 wk DMA. Chart below.(Click to zoom)
 
    • 200 DMA NIFTY is 5230.  and previous high of 5360 made on 28 Oct 2011.
  • Markets generally bottom 4 to 6 months AFTER central bank starts cutting rates. So if from Jan`12,RBI starts cutting rates ( CRR to begin with), we could see bottom by Apr-Jun`12.
  • Index heavyweights such as IT and Banks are not that likely to give continued support to a the rally.Results of IT weren't that great and Banks results also will be mediocre.
Summary Table
Disclosure:  No F&O open positions.
An interesting correlation between AUDUSD and India NIFTY. 
Chart below

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