Saturday, November 01, 2008

Market Mayhem - Decline resolving

Equity markets have never be more correlated. World stock markets have performed equally bad in comparison to each other in the month of October. The US markets have given their worst ever October performance and there is little respite in terms of price rise as yet.

Indian equity markets along with the other Asian markets were hammered down beyond belief. The 'bad news' has started flowing in steadily now as the bear market unfolds. Equity markets would bottom out much before the real economy, as is the case with all bear markets. However there are a few important factors which are giving disturbing long term signals. The inflation expectation of the whole market seems to be one of severe deflation. The yields between regular ten year treasuries in US and the treasury inflation protected securities (TIPS) stood at an incredibly low level of 0.92%. This means the US treasury market is signaling a remarkable slowdown in price rise and in reality is pricing in a falling price scenario. If high inflation is bad, then deflation is even worse.

Another important market that is falling significantly is the gold market. Gold prices have been falling steadily since last two weeks and there is little momentum in the prices as yet. Though chart studies show $700 to be a important support level but the record rise in Gold ETF redemption's have put a question mark on the sustained medium term uptrend.

As I wrote previously that god may be starting a fresh upmove towards $1200 mark if it doesn't close below $734 on international spot markets. I was wrong on that part as it closed below $734 yesterday on a weekly basis. Now the important thing to notice is if the inflation expectation in the world economy remains so weak as they are right now, there is little incentive in holding gold in the medium term. The Elliott wave structure suggests that prices can decline to $544 before basing out.

The Indian equity markets have seen a big slide in prices. Price deterioration has been steep in all Asian markets. Indian markets performed badly in the month of October. From a valuations point of view the markets are in a screamingly valuable zone. These prices are suitable for long term investors to make portfolios. Looking at price graph for Nifty it seems the current uptick will eventually get sold into. Have a look at the revised Elliott wave count.

As I mentioned previously that we are in the final leg down of the bear market which began with a decline from Nifty high of 6357.

The first leg down which ended at 4448
Second leg was a counter trend upmove which ended at 5299
Third leg is the current move which has extended down to a low of 2253

The current fall i.e. the third fall is nearly 1.618 of the total downward move of the first fall.

From the current price levels a further upmove to a range of 3500 to 3700 can be expected. Since we are in the fourth wave of the decline of wave C it can end at the termination of the lower degree fourth wave which was at 3780. There any move to that level may get sold into and then the final leg of the current decline will begin. Nifty has seen a selling climax and final downward move may be truncated and may see formation of a bullish contracting triangle. The fall from 3500-3700 range will give one of the best opportunities in decades to buy into the Indian markets.

It is important to note that we are nearing the 2010 deadline of the kondratieff wave for which Nikolai Kondratiev was jailed. According to his analysis the credit cycle would bust by 2010 and leverage would come down to 10:1 as compared to 40:1. We are indeed working towards that level.

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