Thought for the day
"Time is an illusion. Lunchtime
doubly so."
-
Douglas Adam (English, 1952-2001)
Word for the day
Polyglot (adj)
Containing, composed of, or written in several languages.
Able to speak or write several languages; multilingual.
(Source: Dictionary.com)
Malice towards none
Justice Tamilvanan of
Hon'ble Madras High Court decides in favor of Baba Saheb in Ambedkar vs. Marx.
Some more miles to go before I slip
After a scaring the traders in March, the Indian equity markets
are again alluring them with promise of quick and good gains.
The investors who have been hoping for a deeper correction are
becoming little restless in their seats.
The unusual weather that according my survey has definitely
caused extensive damage to rural economy, has not reflected on the economic
data so far. The recent IIP and consumer price data has provided some reasons
for buoyancy in the markets.
The last FOMC minutes suggested that many members of US Federal
Reserve prefer "the Lift" to begin in June 2015, leading to renewed
strength in USD. The crude oil prices have risen over 30% from their 2015 lows.
The fruit, vegetable, pulses, and spice
prices in domestic markets have jumped.
The 4QFY15 result season gathers pace this week. Most analysts
have downgraded their forecast for FY15 as well as FY16 revenue and margins
growth.
The political scene is getting murkier with passage of every
day. The government seems to be talking in twenty different voices sending
confusing signals.
The factors like economic distress in rural economy, rising
unemployment in urban areas, simmering communal tension, and desperation in
opposition parties to create some powerful emotional platform that could help
in consolidating non BJP votes are fueling civil unrest across country.
However, the appetite for Indian equities has seen little signs
of cooling off. The resilience of market to any bad news and incessant flow of
foreign money is mischievously patting on the nerves of those who hold the
belief that the dawn of good days is not imminent.
In this backdrop, it is critical to examine what markets
technical are signaling.
Greed has overtaken
the fear
Typically, a bull phase begins with the smart money discovering
the value in the market. The benchmark indices comprising market leaders begin
to outperform the broader markets. Safety of principal and fear of further fall
in market is still the dominant sentiment.
In the middle of the bull phase the followers join the rally.
Having missed the rally in market leader, the herd usually tries to discover
value in broader markets. Fear now paves for rationality and return
optimization. The broader market begin to marginally outperform the benchmark
indices in this phase.
In the last phase, the masses join bandwagon. Discovering multi
baggers and return maximization becomes a passion. Greed is conspicuously the
dominant sentiment. The divergence between the benchmark and broader markets is
stark. The jargon changes. New valuation methodology is invested to justify the
irrationality in valuations. Proliferation of companies with unproven business
models is quite normal in this phase.
The reversal post this phase is often sharp, deep and painful.
The broader markets crash vertically. The benchmark indices correct sharply.
To my mind, we are in last days of the middle phase of the
current bull market. The broader markets have began to outperform sharply. The
greed is beginning to overtake as dominant sentiment.
Chart 1 below shows the 2005-2009 market cycle. As could be seen
the lasted six months (July 2007 to January 2008).
...peak may be just around the corner
The current bull market began in 2012 with P. Chidambram taking over
as Finance Minister, putting GAAR on back burner, initiating a series of
corrective fiscal and development measures at a time when US Fed and ECB were
creating unprecedented amount of money available at extremely low rate to
global investors.
The pace of bull market accelerated materially after Raghuram
Rajan was appointed RBI governor in September 2013 and he took a series of
policy measures to the liking of global investors.
With the change of government in May 2014, the market changed
the orbit to move into the second phase. The broader markets have been
outperforming since then. However, the outperformance has increased sharply in
recent weeks.
Chart 2 shows that we might just have entered the last phase
that could last 2 to 6months. Looking at the sharp gain, lacking business
momentum, and adverse global economic conditions, the correction may be quick
and sharp. Though in absence of global shock, the correction may not be as deep
as it was in 2008-09.
...and the fall will depend on the rise
In pure technical terms, the market fall post the current phase
will depend on how far the broader market go in the current run. The higher
they go - deeper they would fall.
In terms of Nifty, the possible scenarios, in my view, are as
follows:
(a) The most likely
scenario is that Nifty makes a new high close to 9450 in next three months and
corrects 13-18% from that high in 7750-8050 range, just shy of slipping into
bear market with >20% correction.
(b) The alternative
scenario is that Nifty peaks in +2% range of its recent highs and
correct 10% from that peak in a normal market correction. The likely Nifty
range in such case would be 8350-9270.
(c) In the less
likely scenario Nifty may keep moving in 8470-9100 range while broader market
rise about 5-7% from current level.
In either case, Nifty may rise 3-7% from current level, and
broader markets may rise much faster and higher.
Alternatives are
becoming unattractive
One of the reasons behind sharp rally in equities is the poor
performance of alternatives like real estate, gold, oil and USD.
Traders must keep a close watch on the performance of USD and
crude oil to preempt the correction in equity prices.
Volatility is low
The persistent low volatility also indicates that the current
market rally has more legs and could cover material distance from current
level.
The traders should keep a close watch on the following chart. A
sharp rise in India VIX could signal imminent peak followed by sharp
correction.
...and FII flows are good
Trivia
Without passing a
judgment on the appropriateness or legality of the proposals to curb Net
Neutrality, I would like to say that the debate over Net Neutrality in India is
unfortunate.
It is just another example of lack of conceptual clarity and
commitment to economic growth amongst various organs of the government and BJP.
For example, it completely contrasts with the principal
development paradigms like Digital India, Smart Cities and Make in India. It
violates the commitment of Red carpet to foreign enterprises and investors.
The latest prints of IIP and CPI date are counterintuitive. I am
not sure how many people would like to adjust their growth, rate and inflation
expectations based on these data.
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