So the adage 'Sell In May & Go Away' did not hold fort as far as Nifty goes. The selling happened and there was a pullback with a critical close above 8410 to end May 2015. Yesterday European markets ended sharply lower with DAX taking the strongest beating but our markets went through their own trajectory. Let us have a quick review of charts
Nifty Daily
Nifty Weekly
BankNifty Daily
BankNifty Wekly
Nifty chart is extremely clear with the corrective phase. The 50 DMA line has crossed below 100 DMA confirming a corrective phase. As of now, the upside seems capped around 8625 levels and a test of 7800 is on the cards. Over the last 2 months, on 3 instances, Nifty has hit the 50 DMA and moved lower. Once on 17th April [when downtrend was strongly pronounced], second time on 22nd May around 8477 and on 29th May. Now if it does manage to pierce it with a follow up in first week of June, there is every likelihood of testing the upper end of the channel at 8625 levels. As long as 8625 is not breached on closing basis on daily and weekly basis on upside, the rallies are merely corrective bounces. Have a look at this chart
This is the corrective phase that started in Nov '10 and ended in Dec '12. There is uncanny resemblance in the pattern exhibited on Nifty currently. [However, a similar pattern was shown earlier around Diwali 2014 and it got invalidated subsequently] In the current scenario, the pattern will get invalidated with 2 consecutive closes above 8625 on daily basis or a weekly close above 8625
What is divergent at the moment is the BankNifty Chart
In the Nov '10 - Dec '12 corrective phase, Nifty and BankNifty were pretty much following the same path. The present price Nifty chart is having the same pattern as that of Nifty Nov '10 chart but not the BankNifty chart. BankNifty also had a corrective channel and that has broken on the upside last week. Of course the Nifty index components have changed significantly compared to 2010 and changes in stocks like Asian Paints, ITC, Sun Pharma have a lot of bearing on the index. Even with these exceptions, the current divergence on BankNifty is too high to be ignored.
If this is just a rally on expectations of a rate cut on 2nd June, it will fizzle out. We have to wait and see how BankNifty behaves around the 18800 levels spot and how it pans out. 2 consecutive closes above 18800 on BankNifty implies a large retrace of the fall from 20500 levels to 17200 levels with a minimum target of 19200. On the downside, the 17800-18200 levels should be able to provide support. Failure to hold 17800 levels on a weekly basis will give a steeper cut towards 16800. So the jury is split wide open on BankNifty and the range is too large 16800 - 19200 [Definitely not useful for trading].
From a trading perspective, we have to go with shorter time frames. The first sign of danger for bears will be breach of 18800 on upside on closing basis. The first sign of danger for bulls will be collapse of 18250. By 5th June, there should be some clarity on this front. Keep a watch on the Twitter feed for daily levels.
There are a lot of expectations on the basis of projects announced by the government and people are wondering why equities are not reacting to these news. As the saying goes, markets discount the future well in advance. Positives from these projects at infrastructure level and public spending were already discounted last year.
On the positive side, German elections, UK elections have all played out. There is only negative, impending and that is future of PIIGS in Euro-zone. Greece will be the first one on news and that was the reason for sharp collapse on DAX and CAC yesterday. We need to remember that a lot of that has been factored in and over the last 2 years, ECB has ring-fenced itself well with LTRO and liquidity measures. However, in the unlikely event of Greece getting out of the Euro-block [either being booted out or Greece exiting on voluntary terms], there will be a bout of panic that will spread globally. What will shake institutional investors is not Greece per say. It is the risk of contagion spreading across Europe that will trigger panic. In the short-term, if such a thing happens, there will be a capital flight to safety to the US Dollar and German Bunds. [I will cover the Euro-zone issue in a separate post later today]
Such panic will affect all markets globally but technicals will eventually rule back. So as far as Nifty is concerned, with such a long sustained tenure above levels attained in May 2014, 7200-7400 is the technical bottom. Short term irrationality may taken levels lower but the rebound will be equally sharp and swift [Remember that the technical bottom prior to Lehman Brothers crisis was 3900 but the collapse continued through to sub-3k levels only to recover] Another difference between the Lehman Brothers collapse and current crisis is that Lehman Brothers was an unknown event. Things were hunky dory and it came as a jolt to people across the globe. This time around, at least with the Euro-zone crisis, the surprise factor is not in the picture. The issue has been in the news since 2010 and given institutional investors adequate time to prepare themselves.
However, there could be some black swan events that can happen, triggering a strong correction in markets. As the adage goes, correlation can be established but not causality. During the run-up to elections to 2014, I mentioned how fashion trends, media trends are all pointing towards a strong bull market for 2014 [Yes, I do believe in Pretcher's concept of Elliott Waves as well as Social Mood; that he has got things wrong since 2010 are a result of his biased thinking and self-fulfilling prophecy syndrome]
So what are the social indicators pointing out that a major correction will come through over the next 18-24 months
Box Office Collections: With the multiplex introduction, we have had so many genres of movies hit the box office over the last few years. In 2013-2014, even movies like Fukrey, Vicky Donor had high footfalls and showed that social mood was turning positive. Over the last 6 months, even big names and big stars have failed to set cash registers ringing. On the fashion front, advertisements were extremely bold, embarrassing parents when they showed up on screens during prime time. Now advertisements are getting even more irrational; "Ghar mein lagao HD color???", "Platinum 3G has arrived to Mumbai???" Last but not the least, BFSI companies advertising "This is the sweet spot for equities in the long run" We are approaching a top for sure.
Technology has been a great enabler for making life productive. Smartphones, internet and cloud computing are all examples of how automation and technology makes us more productive. However, when valuations reach maniac proportions, it is sign of trouble. Billions of dollars for whattsapp, bookmyshow, olacabs, zomato are signs of trouble. Google has its base in advertising and the same is the case with Facebook as well. Whattsapp despite being a free platform for users, has an extremely high value for larger hi-tech companies due to the fact that it records the mobile numbers of people and will help business analytics tremendously but 19 billion??? Give me a break. We are looking at the same mania in the internet space at the moment. It is due for consolidation and there will be some clear winners. However, there will be far more flops than hits and the entire funding that technology startups are getting are in the hopes of a good IPO. All the discounts that are being showered now can be recouped with a good IPO. As soon as the credit squeeze hits markets due to geo-political and socio-economic factors, technology funding will take a hit.
Fibonacci Timing
2-3-5-8-13-21-34 are critical Fibonacci numbers. 2016 marks an 8 year period from the Lehman Brothers crisis. 2015 marks a 5 year period from the time Euro-zone crisis that first surfaced. [And 2008 marked the 8 year period from the 2000 economic debacle busting startup technology] The social mood and Fibonacci points towards a correction globally. That being said, it is difficult to know exact timing of events. Blind shorting can create challenges as markets are irrational. Suffice to say that beware - sudden negative surprises can spring up at a time most unexpected
Statistical Significance
I mentioned this in my earlier post this year as well; historically, the 3rd year of the 2nd term of a US president marks a strong correction in markets. Let us look at extremely strong global market corrections over the last few years [Taking into account 2 consecutive terms of the US President]
Roosevelt started his presidential term in 1933 [when recovery from 1929 was underway] and extended and ended with World War 2
October 1987 - 2nd term of Ronald Reagon [President from Jan '81 to Jan '89]
October 2000 - 2nd term of Bill Clinton [President from Jan '93 to Jan '01]
October 2008 - 2nd term of George Washington Jr [President from Jan '01 to Jan '09]
Currently Obama is serving his 2nd term and is in his 3rd year!
I am only taking into account 2 consecutive terms of a US President over the last few years and global economic scenario. Truman was the only exception when there was no major economic collapse globally. All countries were trying to bounce back from the debacle of World War 2.
What is important is that there is 'statistical correlation' with 2nd consecutive terms of US presidents, especially in their 3rd years of the 2nd term. We are not blaming the presidents here for economic debacles - please that should not be the inference. As Naseb Taleb says in fooled by randomness, "Don't look for patterns in what could just be a cinnamon roll"
From my personal outlook, social mood, Fibonacci and statistical outlook when all these converge towards one outlook - it is too strong to be ignored. Last but not the least, the surge in global equities has in no way created better job situations on ground. So if one keeps on shorting the market looking at these factors on a stand-alone basis, the odds of losing money are higher.
Even globally, there is a remarkable shift in the underlying principles of capital markets be it bonds, stock indices or currencies. DJIA = Dow Jones Industrial Average
What are the major components of DJIA today? Apple, American Express, Visa, Microsoft, IBM, Verizon, United Technologies. From the conventional manufacturing and industrial space, we just have names like Boeing, GE, Merck, Coca Cola, Mc Donalds, Chevron and Du Pont. Boeing is highly cyclical and is on the verge of topping out, GE is increasingly shifting to cloud computing and services as manufacturing is taking a hit. Nevertheless, if Apple, Microsoft, IBM could propel Dow to new highs, these very stocks can pull them down as well.
As interest rates reduce, currencies were expected to behave in a certain manner and hyper-inflationary pressures should have triggered economies. 5 years of rampant money printing has had little impact on the US dollar [it has only strengthened], commodity markets have collapsed, and people are flocking to US Treasuries and German Bunds. This is simply because the rules of the game have changed. US dollar and German Bund are perceived as safe havens for separate reasons and hence classical theories no longer work. In older days, the job market and economic activity were positively correlated with equity indices. That is no longer the case.
Precious Metals and Crude
I keep repeating this every month. Gold and Silver have had a 13 year mega-bull run from 2001-2013. So a 3 year correction is fairly logical in terms of time. In terms of price, I think prices have found bottoms in dollar terms. For gold, any severe correction due to deleveraging of institutional speculative positions will still arrest prices within the 1000 dollars per ounce band. All said and done, at sub-1200 levels, most gold mines are making losses. And sub-1200 per ounce prices trigger a great demand for physical deliveries of gold by a lot of eastern nations. Since we are at the fag end of the correction in gold, over a longer term horizon, one can still expect a 10% appreciation per annum over the next 5 years. Silver as an industrial metal is losing sheen but is finding uses elsewhere. It is poised to grow higher again by about 10% per year.
Crude oil, for all the negative commentary in the media, prices have already regained some gains and from a technical perspective, the fall from 105 levels on Nymex to 45 levels will create opportunities for a 50% retracement towards 70 dollars a barrel by the end of this year
To wrap up, Nifty trend will get clearer by 5th June. The period from 15th June to 30th June will be highly volatile with 21st June Summer Solstice being a critical turning point. As of now, the range for the Nifty is at 7800 on the lower end to 8625 on the upper end. Should there be a change in this outlook, I will update it on the Twitter feed.
From this month, there will be a special contest for all viewers of this blog. Predict the Nifty closing level for each day on Twitter with #NiftyParadoxContest on twitter and also update your entries on this document EOD JUNE CONTEST. The top 3 winners will get gift vouchers. [To participate, you just need to share your Twitter handle and/or email address. The entry must be done by 2pm of that trading day]
Enjoy a happening and exciting June series.
Nifty Daily
Nifty chart is extremely clear with the corrective phase. The 50 DMA line has crossed below 100 DMA confirming a corrective phase. As of now, the upside seems capped around 8625 levels and a test of 7800 is on the cards. Over the last 2 months, on 3 instances, Nifty has hit the 50 DMA and moved lower. Once on 17th April [when downtrend was strongly pronounced], second time on 22nd May around 8477 and on 29th May. Now if it does manage to pierce it with a follow up in first week of June, there is every likelihood of testing the upper end of the channel at 8625 levels. As long as 8625 is not breached on closing basis on daily and weekly basis on upside, the rallies are merely corrective bounces. Have a look at this chart
What is divergent at the moment is the BankNifty Chart
If this is just a rally on expectations of a rate cut on 2nd June, it will fizzle out. We have to wait and see how BankNifty behaves around the 18800 levels spot and how it pans out. 2 consecutive closes above 18800 on BankNifty implies a large retrace of the fall from 20500 levels to 17200 levels with a minimum target of 19200. On the downside, the 17800-18200 levels should be able to provide support. Failure to hold 17800 levels on a weekly basis will give a steeper cut towards 16800. So the jury is split wide open on BankNifty and the range is too large 16800 - 19200 [Definitely not useful for trading].
From a trading perspective, we have to go with shorter time frames. The first sign of danger for bears will be breach of 18800 on upside on closing basis. The first sign of danger for bulls will be collapse of 18250. By 5th June, there should be some clarity on this front. Keep a watch on the Twitter feed for daily levels.
There are a lot of expectations on the basis of projects announced by the government and people are wondering why equities are not reacting to these news. As the saying goes, markets discount the future well in advance. Positives from these projects at infrastructure level and public spending were already discounted last year.
On the positive side, German elections, UK elections have all played out. There is only negative, impending and that is future of PIIGS in Euro-zone. Greece will be the first one on news and that was the reason for sharp collapse on DAX and CAC yesterday. We need to remember that a lot of that has been factored in and over the last 2 years, ECB has ring-fenced itself well with LTRO and liquidity measures. However, in the unlikely event of Greece getting out of the Euro-block [either being booted out or Greece exiting on voluntary terms], there will be a bout of panic that will spread globally. What will shake institutional investors is not Greece per say. It is the risk of contagion spreading across Europe that will trigger panic. In the short-term, if such a thing happens, there will be a capital flight to safety to the US Dollar and German Bunds. [I will cover the Euro-zone issue in a separate post later today]
Such panic will affect all markets globally but technicals will eventually rule back. So as far as Nifty is concerned, with such a long sustained tenure above levels attained in May 2014, 7200-7400 is the technical bottom. Short term irrationality may taken levels lower but the rebound will be equally sharp and swift [Remember that the technical bottom prior to Lehman Brothers crisis was 3900 but the collapse continued through to sub-3k levels only to recover] Another difference between the Lehman Brothers collapse and current crisis is that Lehman Brothers was an unknown event. Things were hunky dory and it came as a jolt to people across the globe. This time around, at least with the Euro-zone crisis, the surprise factor is not in the picture. The issue has been in the news since 2010 and given institutional investors adequate time to prepare themselves.
However, there could be some black swan events that can happen, triggering a strong correction in markets. As the adage goes, correlation can be established but not causality. During the run-up to elections to 2014, I mentioned how fashion trends, media trends are all pointing towards a strong bull market for 2014 [Yes, I do believe in Pretcher's concept of Elliott Waves as well as Social Mood; that he has got things wrong since 2010 are a result of his biased thinking and self-fulfilling prophecy syndrome]
So what are the social indicators pointing out that a major correction will come through over the next 18-24 months
Box Office Collections: With the multiplex introduction, we have had so many genres of movies hit the box office over the last few years. In 2013-2014, even movies like Fukrey, Vicky Donor had high footfalls and showed that social mood was turning positive. Over the last 6 months, even big names and big stars have failed to set cash registers ringing. On the fashion front, advertisements were extremely bold, embarrassing parents when they showed up on screens during prime time. Now advertisements are getting even more irrational; "Ghar mein lagao HD color???", "Platinum 3G has arrived to Mumbai???" Last but not the least, BFSI companies advertising "This is the sweet spot for equities in the long run" We are approaching a top for sure.
Technology has been a great enabler for making life productive. Smartphones, internet and cloud computing are all examples of how automation and technology makes us more productive. However, when valuations reach maniac proportions, it is sign of trouble. Billions of dollars for whattsapp, bookmyshow, olacabs, zomato are signs of trouble. Google has its base in advertising and the same is the case with Facebook as well. Whattsapp despite being a free platform for users, has an extremely high value for larger hi-tech companies due to the fact that it records the mobile numbers of people and will help business analytics tremendously but 19 billion??? Give me a break. We are looking at the same mania in the internet space at the moment. It is due for consolidation and there will be some clear winners. However, there will be far more flops than hits and the entire funding that technology startups are getting are in the hopes of a good IPO. All the discounts that are being showered now can be recouped with a good IPO. As soon as the credit squeeze hits markets due to geo-political and socio-economic factors, technology funding will take a hit.
Fibonacci Timing
2-3-5-8-13-21-34 are critical Fibonacci numbers. 2016 marks an 8 year period from the Lehman Brothers crisis. 2015 marks a 5 year period from the time Euro-zone crisis that first surfaced. [And 2008 marked the 8 year period from the 2000 economic debacle busting startup technology] The social mood and Fibonacci points towards a correction globally. That being said, it is difficult to know exact timing of events. Blind shorting can create challenges as markets are irrational. Suffice to say that beware - sudden negative surprises can spring up at a time most unexpected
Statistical Significance
I mentioned this in my earlier post this year as well; historically, the 3rd year of the 2nd term of a US president marks a strong correction in markets. Let us look at extremely strong global market corrections over the last few years [Taking into account 2 consecutive terms of the US President]
Roosevelt started his presidential term in 1933 [when recovery from 1929 was underway] and extended and ended with World War 2
October 1987 - 2nd term of Ronald Reagon [President from Jan '81 to Jan '89]
October 2000 - 2nd term of Bill Clinton [President from Jan '93 to Jan '01]
October 2008 - 2nd term of George Washington Jr [President from Jan '01 to Jan '09]
Currently Obama is serving his 2nd term and is in his 3rd year!
I am only taking into account 2 consecutive terms of a US President over the last few years and global economic scenario. Truman was the only exception when there was no major economic collapse globally. All countries were trying to bounce back from the debacle of World War 2.
What is important is that there is 'statistical correlation' with 2nd consecutive terms of US presidents, especially in their 3rd years of the 2nd term. We are not blaming the presidents here for economic debacles - please that should not be the inference. As Naseb Taleb says in fooled by randomness, "Don't look for patterns in what could just be a cinnamon roll"
From my personal outlook, social mood, Fibonacci and statistical outlook when all these converge towards one outlook - it is too strong to be ignored. Last but not the least, the surge in global equities has in no way created better job situations on ground. So if one keeps on shorting the market looking at these factors on a stand-alone basis, the odds of losing money are higher.
Even globally, there is a remarkable shift in the underlying principles of capital markets be it bonds, stock indices or currencies. DJIA = Dow Jones Industrial Average
What are the major components of DJIA today? Apple, American Express, Visa, Microsoft, IBM, Verizon, United Technologies. From the conventional manufacturing and industrial space, we just have names like Boeing, GE, Merck, Coca Cola, Mc Donalds, Chevron and Du Pont. Boeing is highly cyclical and is on the verge of topping out, GE is increasingly shifting to cloud computing and services as manufacturing is taking a hit. Nevertheless, if Apple, Microsoft, IBM could propel Dow to new highs, these very stocks can pull them down as well.
As interest rates reduce, currencies were expected to behave in a certain manner and hyper-inflationary pressures should have triggered economies. 5 years of rampant money printing has had little impact on the US dollar [it has only strengthened], commodity markets have collapsed, and people are flocking to US Treasuries and German Bunds. This is simply because the rules of the game have changed. US dollar and German Bund are perceived as safe havens for separate reasons and hence classical theories no longer work. In older days, the job market and economic activity were positively correlated with equity indices. That is no longer the case.
Precious Metals and Crude
I keep repeating this every month. Gold and Silver have had a 13 year mega-bull run from 2001-2013. So a 3 year correction is fairly logical in terms of time. In terms of price, I think prices have found bottoms in dollar terms. For gold, any severe correction due to deleveraging of institutional speculative positions will still arrest prices within the 1000 dollars per ounce band. All said and done, at sub-1200 levels, most gold mines are making losses. And sub-1200 per ounce prices trigger a great demand for physical deliveries of gold by a lot of eastern nations. Since we are at the fag end of the correction in gold, over a longer term horizon, one can still expect a 10% appreciation per annum over the next 5 years. Silver as an industrial metal is losing sheen but is finding uses elsewhere. It is poised to grow higher again by about 10% per year.
Crude oil, for all the negative commentary in the media, prices have already regained some gains and from a technical perspective, the fall from 105 levels on Nymex to 45 levels will create opportunities for a 50% retracement towards 70 dollars a barrel by the end of this year
To wrap up, Nifty trend will get clearer by 5th June. The period from 15th June to 30th June will be highly volatile with 21st June Summer Solstice being a critical turning point. As of now, the range for the Nifty is at 7800 on the lower end to 8625 on the upper end. Should there be a change in this outlook, I will update it on the Twitter feed.
From this month, there will be a special contest for all viewers of this blog. Predict the Nifty closing level for each day on Twitter with #NiftyParadoxContest on twitter and also update your entries on this document EOD JUNE CONTEST. The top 3 winners will get gift vouchers. [To participate, you just need to share your Twitter handle and/or email address. The entry must be done by 2pm of that trading day]
Enjoy a happening and exciting June series.
