Tuesday, March 31, 2009

Market Mayhem: End of the mayhem?

I started writing this blog post with the headline 'market mayhem' with a view that stock prices in India had a huge room to fall. Back then markets were trading at 5000 Nifty Index level. Over the period of time we have seen periods of very high inflation where domestic CPI touched levels of 20% in some cities. With stocks being punished heavily due to risk aversion sentiment across the equity market there was little respite for any sector.

In the last few months little has changed in the sense of economic parameters other than some fiscal measures and another round of same old monetary medicine being administered by RBI in India.

Lets see what has really changed for India in the present scheme of things.

First is the change in the apparent value of Indian equity markets. The last few years were exceptional where foreign money scrambled for stocks in emerging markets with a view to make superior returns. In think this sentiment will not return for years to come. The very base of this capital flow was institutional money and lot of super HNI clients investing through the hedge fund route. That would stop as most of these so called alternate investment funds in western markets have gone under.

The basic foundation of the Indian growth story has been higher domestic demand. However, the real demand has to remain robust over the next few years in order to drive the economic growth. Indian central bank has blindly followed other banks to increase money supply in order to end the current credit crisis. In the short term it may work, but over a period of time, this would be a disaster in itself if not controlled. Fiscal measures is the need of a growing economy, if at all any measure is required for a free market to grow. Too much control in the hand of central banks have done nothing great in the past and would not help in the future.

Second, Indian growth story would get stronger with rising income levels as propensity to consume and produce increases. It should in no way be magnified with excess capital, read money supply, without considering its after effects. A proper mechanism for growth would be to reward growing sectors and reduce entry barriers in under performing sectors. Indian policy makers are know to do the opposite. Financial sector in no way should become the central and core issue in policy making. In the last few years, pricing issues, financial regulations and price controls have dominated the policy making in India. This trend is dangerous for the long term health of the economy. Rather policy making should focus on core sectors like mining, power and infrastructure.

Third, for any sustainable economic development to happen, domestic power generation has to rise multi fold. This would lead to increase in the standard of living in various small town regions and induce economic stimulant effect.

I would cut a long story short here. Lets just see what the markets have to offer here. Now, in the short term the stock prices are showing a strong trend. There is very little activity in other markets which shows similar price action.

Indian bond markets have given clear signals of loose monetary policy in the next few quarters. However other markets are not showing very strong signals. Indian rupee has not strengthened and remains a weak point to build a bullish case. Commodity prices in India are still falling and are expected to remain soft.

Indian growth story is going to rebound by the end of this year. This is apparent from relative strength in equity prices. However bond yields need to remain low for economic growth to get the necessary stimulant effect of fiscal measures. But market driven yields on the long end of Indian markets show expectation of strong economic growth.

Going to the elliott wave count that I had posted earlier. I think the wave '5' down of ABC has resolved in a truncation. Though markets have gone into a rectangular formation and there is actually a low probability of any view being right here, I feel markets have formed a cyclical bottom if not a major bottom. See the following graphs. A good strategy from here is to buy out performing sectors which are dirt cheap when index goes down to 2780 to 2850 levels. See the following graphs. I think there is risk to this count but this is the most probable count at present.

Nifty Daily

Nifty Weekly

Nifty Monthly

Prices suggest that index has bottomed out. Lets go with the prices and call this a bottom, which means new lows are highly unlikely in the near future.

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