Wednesday, April 15, 2015

Some more miles to go before I slip

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.
 Some more interesting reads:

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