Well the last 2 sessions have been sending shock waves across markets. Everybody is wondering what the hell is happening. The last time, such deep corrections at index level happened was in 2008-2009. In my tweets and previous posts, I had categorically mentioned that 64.25 on USD-INR would be a firewall breach as far as equities are concerned.
However yesterday's fall did surprise a lot and in all likelihood, there could be some steeper cuts this week. What was surprising was that a lot of media pundits tweeted "When the US market sneezes, the world gets fever" or something on those likes. Bull**** I say to them. It is not even an apple to orange comparison - understand this; the market capitalization of Apple [AAPL] is equal to the market capitalization of the Indian stock market [well almost]
We have our own cues and own technicals and fundamentals. Most of the major bad news have been put behind us; Grexit avoided [at least for now] and hence Euro-zone is stable. US Fed Rate hike will take a bit longer. Then comes the Chinese dragon. A country can't keep on growing at the same rate for perpetuity. The strong 7% to 8% growth posted for over a decade now have as it is more than tripled the country's GDP. Now the base effect is much larger.
Commodity prices are collapsing and in most likelihood are in the last leg of fall. Given current prices, cost of production is way below market costs. Most players will stop production as it will only amplify losses. So a recovery in commodity prices is the next logical step over the next few months [I have given my reasons vis a vis Dollar Index in my previous post]
Let us evaluate Nifty. Below are the Weekly Charts based on yesterday's close
Nifty Weekly
However yesterday's fall did surprise a lot and in all likelihood, there could be some steeper cuts this week. What was surprising was that a lot of media pundits tweeted "When the US market sneezes, the world gets fever" or something on those likes. Bull**** I say to them. It is not even an apple to orange comparison - understand this; the market capitalization of Apple [AAPL] is equal to the market capitalization of the Indian stock market [well almost]
We have our own cues and own technicals and fundamentals. Most of the major bad news have been put behind us; Grexit avoided [at least for now] and hence Euro-zone is stable. US Fed Rate hike will take a bit longer. Then comes the Chinese dragon. A country can't keep on growing at the same rate for perpetuity. The strong 7% to 8% growth posted for over a decade now have as it is more than tripled the country's GDP. Now the base effect is much larger.
Commodity prices are collapsing and in most likelihood are in the last leg of fall. Given current prices, cost of production is way below market costs. Most players will stop production as it will only amplify losses. So a recovery in commodity prices is the next logical step over the next few months [I have given my reasons vis a vis Dollar Index in my previous post]
Let us evaluate Nifty. Below are the Weekly Charts based on yesterday's close
Nifty Weekly
For Nifty, there are 2 swings to take into account
1] Swing from 5100 to 9100 [Aug ' 13 lows to the all-time high, rounded]
61.8% retracement = 6628 [Longer Term]
2] Swing from 6400 to 9100 [Last Major Swing High To all-time high, rounded]
61.8% retracement = 7431 [Medium Term]
The base building around 7400 levels has been well cemented from May 2014 till date. In the short term, I don't think we will go below 7400 levels [even with a sharp correction for now]
By Diwali 2015, we can expect Nifty to scale 8550 at a minimum [barring Black Swan events]
Given the volatility, it might be difficult to trade FnO unless one is seasoned and disciplined. However, SIP with 4 to 5 tranches in blue chips will be a good way to play the current fall.
Also, we need to look at the behaviour of Nifty on a larger time frame with fundamentals in place. The Nifty cycle is largely driven by the political cycle
First major life-time high was in Jan '08 [6357] and the same was fueled for 4 years with UPA 1 and the credit expansion with the US housing markets and advent of Euro
The technical bottom for the same was expected at 3900 but the severity of credit crisis post Lehman Brothers took it down to 2252 levels but within 6 months, the technical bottom was reclaimed
UPA 2 brought in the next major leg up with a significant gap-up and then we went on to retest 6338 in Nov '10. QE facilitated a major portion of the subsequent rise post May '09
Then we went to a corrective mode [6338-5691-6181-5177-5944-5196-5740-4728-5400-4531] from Nov '10 to Dec '11
There was a good rally as a precursor to elections 2014 and we saw a huge gap-up and lifetime highs yet again. Liquidity injections by ECB, BoJ and BoE helped despite Fed taper.
But can you observe a pattern over here? The large chunks of upside happen around the election year with stratospheric levels and then we get into a corrective mode. Corrections come with a combination of domestic and global factors. When the correction is driven by domestic factors, it is less severe in terms of price but longer in duration. When the correction is driven by global factors, even the deepest supports get breached in panic only to see things recover within a short time period at least to the technical supports.
Come on let us face it - markets will have swings up and swings down. India has had meteoric rallies over the last 2 years with the index almost doubling and individual stocks even tripling and quadrupling. I am not talking about mid-caps here but large caps.
Axis Bank, ICICI Bank, Kotak Bank, Yes Bank, SBI all have doubled tripled or quadrupled
Infosys, Wipro and TCS have more than doubled
Britannia, HUL, Dabur etc
LT, BHEL more than tripled
MRF, Bosch, Maruti, M&M have quadrupled
The heartening part of the rally this time has been the fact that blue chips have performed extremely well with existing business models [unlike Suzlon, Unitech, JP, DLF, ADAG Group etc that was the case last time]
If we look at the Rupee-Dollar exchange rate, so far the correction has been less severe. In 2010-2011, when the rupee went from 48.25 to 52.25, the index shaved off over 30% in less than 6 months from 6338 levels.
Bottom-line: Corrections are good and healthy for the market. Regardless of where the current correction ends, Nifty has a very high probability of reclaiming 8550-8600 levels [if not more] within the end of 2015 [barring Black Swan Events]. Use current corrections to buy on delivery basis in a systematic and phased manner. As usual, a well diversified way would be to buy Nifty Bees and BankBees. I won't recommend Junior Bees and Infra Bees as of now because they are still very expensive and are most fragile [When I had recommended these last time, InfraBees was around 180 a piece and Junior Bees was around 115 a piece. Currently these 2 ETFs are way above those prices]
On a longer term horizon, Nifty is well-poised to hit the 5 figure mark of 10k levels but that I reckon will happen only after the next election cycle.
Happy Investing
