‘V’ is the word for 2009

‘V’ is the word for 2009 so far. I don’t know many market participants who saw the current market rally to be so furious and so fast. Neither did I expect. At best many traders called for a 50% rally over a period of few quarters. Now with most of stock Indices hovering around their 200 DMA in western markets and all Asian indices much higher from their 200 DMA question still looms whether we have entered a bull market or not. In my previous updates on S&P CNX Nifty 50, i.e. the Indian stock index, I had mentioned that prices suggest a bottom when we crossed above the all crucial level of 3200. Asian market too looks like they have formed a strong base. The trouble is the western stock markets. There is no clear indication from these indices whether this is a bear market rally or beginning of a new bull market.

The US stock markets have risen sharply over the last two months. The S&P 500 has rallied to a new high for 2009 which is 39.6% above the March 9th low. There are sector which have rallied in excess of 50% like materials and financials. There are some important changes in different markets that have occurred in the current calendar year. The US yield curve has steepened significantly and commodity prices have staged a strong rally along with an incessant fall in USD. The rising bond yields in a deflationary expectation scenario gave an early signal that stock prices will rebound sharply over a period of time. Equity markets always lag the bond markets and this was true this time also. There are two distinct signals that come from rising bond yields. First is the clear expectation of market participants that the economy is going to recover and growth will lead to inflation. Bond yields would also rise if there is an expectation of inflation without growth. This is a rare phenomenon and can occur only in case of misallocation of capital. This may happen if there is demand for goods and services due to excess liquidity instead of rise in base aggregate demand. Now the current scenario has seen continued unemployment in the US, EU and other western markets. There is continued weakness in retail sales and housing markets in whole of the western world. With stocks rising steadily, the real economy has not thrown out numbers which should appear after such a market recovery. This means that the monetization of debt has lead to a dramatic rise in expectation of a high inflation environment just after a severe deflationary threat. If we see the trajectory of inflation for the last one decade, there has been a dramatic shift from high inflation expectation – just at the turn of the century, then a deflationary threat due to tech bubble, then a high inflationary scenario due to the oil shock and back to deflationary expectation because of the financial melt down. The rapid change in inflationary expectation has been due to the severe monetary policy measured taken by central banks all over the world. The central bank either cut rates too low too soon or remained stubborn over a period of poor growth environment with high interest rates.

With bond yield steadily rising in the western world there is another phenomenon that explains the rise in bond yields. The buyers of western agency and government debt, especially the Asian countries are now worried about the long term stability of most of the western currencies and economies. This is leading them to purchases short term debt and either selling or not buying the long term debt especially in the US. This is leading to a steeping yield curve and a seeming expectation of a rise in inflation expectation. However this theory suffers from a serious threat from commodity prices. Most of inflation sensitive commodities like oil and copper have risen sharply. Gold has lagged this rally but is still near its all time high. The commodity indices have rallied sharply and steadily with support from agricultural commodities which are not directly linked with inflation and are generally cyclical and seasonal. The USD has been another factor which has supported this rally in energy, metals and some agricultural markets. The markets are devaluing the USD and there is a seeming revaluation of commodity prices. It’s been seen time and again the social moods drive the economy rather than the other way round. The bear market of 2008 has left most of the participants fearful of a fall in stock markets. Even a slight correction triggers bad investor confidence and poor financial reporting. So it’s prudent to keep and eye on how the USD moves once equity markets correct. Ultimately investors and governments along with their central banks have always returned to USD in times of crises and it becomes the safe haven when there is a real panic in the market. The argument that USD is doomed in the long term have held but in times of crises investors fear for their funds to be in a place which is ‘too big to fail’ or with some real value like gold.

Rising bond yield combined with huge monetization of debt and an every increasing money supply is creating inflationary expectation. More than any where else the Asian markets with excessively low inflation, high money supply and growing economies are being targeted by all the excess liquidity in the markets. This massive money supply which is not being lent to consumers in the western markets is now travelling to emerging markets and to any other asset class which has some real value or growth expectation. Stock prices in Asia have exploded without any correction as foreign investors flock to these markets. This was augmented with a huge short covering that triggered the bottom in most emerging market equity indices.

Current intermarket relationships suggest that rising bond yields are indeed pointing to inflationary expectation. If bonds stage a rally from the current level, which looks like it would happen sooner than later, it is just a matter of time before the downtrend begins again as high inflation scenario is here to stay for the next few years.

For the next few weeks to quarters focus should be given to movements in the USD, Euro and JPY along with the strength in gold. If equity markets see strong falls on rising volumes and gold rises with ever increasing investment demand, it would be good to have your funds in commodities which have value. Asian and emerging market might be the bubble of the new millennium built of the highest money supply that was ever created.

Market Mayhem - Index explodes

S&P CNX Nifty closed 17% up after the congress came to power again at the centre. It was largely an unexpected result. Especially for me as it defied the trend in other countries which voted out the incumbent governments due to terrorism and financial meltdown. However the verdict created euphoria seen never before and has thrown open the door for our markets to remain the best performing market for the next few years.

The elliott wave count now looks a bit easy to interpret as the rule violation of 3 being the shortest is over. We clearly saw an extension in the third wave and now are in wave 5 of the higher degree wave 1. This means we are about to end the first impulse of the next big bull run. I have been writing this again and again that this is the last leg of uptrend. But it has stretched beyond expectation and it would be wise to wait for it to turn. Meanwhile CNX IT index has formed a definitive reversal signal and looks set to lead on the way down.

The latest elliott wave count on S&P CNX Nifty looks like this -



Your comments and analysis is welcome.

World Market Analysis

World Market Analysis

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Mometum Divergence

Nifty is witnessing strong divergence on various momentum oscillator. Yesterday Nifty formed an outside day which was preceded by a Doji Star pattern. These combination pattern signals exhaustion of the current move and combined with heavy divergence it would limit upside in the index.



This suggest long positions should either be exited or trailed. Selling pressure would be intensified below 3500.

Swift trade update!!

Last week I wrote that market may correct to lower levels. It proved dead wrong as markets regained strength. I have been counting the advance in five waves and last two weeks price range was looking like more of distribution in wave 'b'. However I have to revise the count to the wave 5 in progress of a higher degree wave (I) of a new bull market. A correction may take place once wave 5 exhausts. See the following graph -



In the above graph -

Wave 1 = 2539 to 3103 equals 564 points

Wave 3 = 2962 to 3511 equals 549 points

Wave 5 = 3309 to 3664 equals 355 points till now, may be its the high!!

Now wave 5 cannot be larger than 550 points as it will make wave 3 the shortest and negate the entire 5 upmove count of being a five wave upward impulse. So it looks clear that whatever is the extent of rise Nifty should remain capped at 3844. If it breaks that level too than the whole move becomes corrective. Overall the structure looks healthy and topish. Wave 1 will end with a surprise, overnight. Time projections still have room till mid of may. But Looks like a clear case of being very cautious with mid caps and some large caps.

A Swift Trade!!!

S&P CNX Nifty looks like a nice sell here. See the following graph -

Momentum oscillators have broken down and market will give a highly bearish close if it closes below 3280 to complete a double top pattern. Looks like we are heading to 3100 and possibly 2900. Risk is a new high above 3525.

The fallacy of oneness!!!

Market correlations sometimes become so strong that it is difficult to believe that they will cease to exist one day. From the 1st day of my watching the quote screen there has been news. I have seen news being bombarded on everyone from financial journalist some of whom have never seen a trading platform. They report that Market 'A' closed down or up due to Market 'B'. This is nonsensical to say the least.

As a student of intermarket analysis, it is difficult for me the explain the fallacy of correlation. To be a student of the markets one has to be a student of psychology. Mass psychology is difficult to analyse as it involves many individual. It is always dual in nature. False in its projection and true in its action. We are unable to respect the individuality of each market participant as a decision maker and the combined decision of the market as a whole. This dual relationship leads to the dispersion in prices. Think of prices as thoughts. Most individuals have their own thoughts, some use others' and yet someone have none. Or some market participants dictate prices, some use this dictation and yet some others use the product. From my own experience, I think there are just one in hundred individual who 'wants' to dictate the price. The one who has his own price. It can be right of wrong, low or high. But there is a price, which the market has to accept as an input. Out of this 1 percent there are some individuals who are able to convey the correct price to the market, through their actions. The force of action in the markets being the application of money.

Duality, leads us to perfection. But perfection will lead us to death. Market participants generally follow the direction of being 'guided by the price'. Ironically the tag line of this blog is the same - 'An unbiased view of the markets guided by prices'. Unbiased changes it all. Nonetheless, market participants are trying to get towards the third category of participants. Those who have no thoughts or to say prices of their own. They just take what is given to them. Most of the technical analyst and fundamental analyst fall in this category. They take the historical data of prices or any other parameter and practice a closed vision. Their trading methods become like a auto pilot with no 'sense' of the future but all the inventory of the past.

What is necessary is to move towards the progressive market participants. I call them the alpha. They are the beginning to the deep wealth that can be explored inside the daily pandemonium of financial markets. Alpha would always have the inventory and would know exactly what it tells. It would be ready to share and analyse(give and take) other's inventory of prices(thoughts). But the only difference it has from the other two forms that it would have its own prices.

I was curious to find out that whether current market conditions are as chaotic as they were in the last or the crisis before that. I realized that conditions are less chaotic today. History tells us that the current pace of economic degrowth is one of the worst, if not worst. Even the economic indicators are worse than they were in the most other recession or economic crisis. The public reaction to the events have not been same though. Human beings grow and evolve. People have evolved, they understand that economic growth and degrowth are part of the story, like joy and sorrow. These are the laws of nature so to say. But again as human progress is one phenomenon which is against the law, the change or progress in the market participants sentiment is too against the law of the nature. Market participants have grown. Today we may have very few people who belong to the third category I called the alpha, but they are very large in number than they were. I know this to be true. If it were to be any other way, we would have been at the same economic stand point as we were before alpha started rising.

I have mentioned this concept of rising ticks in financial markets. What it means is that with every passing day, there are more and more financial instruments being traded and added. This leads to a rise in number of ticks traded. Each individual in its own capacity trade more frequently than before. This has been possible due to decrease it transaction costs, increase in technology and a general progressive nature towards the understanding of the financial markets. I have been a critical of this rise. But now I believe this is the one of the few things that has added or raised the bar for rationality in financial markets. Though the concept is again dual in nature, that it involves an increase in lesser degree irrationality and a decrease in higher degree rationality. With a rise in higher degree rationality, meaning long term correctness of the prices the progressive nature of participants is realized. If market participants are evolving and are becoming more efficient than what is giving 'in'. There has to be something which has to given in. Again progress is the eddy. It cannot the explained. What just rises in the entropy. This doesn't mean that markets are progressing towards death, they are actually progressing towards being in a conscious state of correctness and still being away from it. 'The duality'.

Needless to say that my writing and communication skills are inferior to convey exactly what I believe. I still feel market participants who understands this duality would know. And a closing thought is to still know that life and death is a constant occurrence. It is not applicable more anywhere than the financial markets. We evolve every time we perish.

Market Mayhem - The Big spike

Last time I wrote that prices are signalling an end to the bear market. I was rather interested in finding out whether the previous bear markets ended in the same manner that we witnssed this time. WIthout much delay, take a look at the following graph. It is very similar to the graph made by dshort.com. Actually I was interested in making one for the sensex.

Sensex - The Four Bear Markets

There is a compelling evidence that the last bear market of 2000 is similar to the current move. The bottoming out process is quite similar and the subsequent rally is also significant.

Coming to the Elliott wave analysis, we are forming the wave '1' of a larger degree impulsive wave to the upside. The current move suggest that the wave '1' is in the final stages of formation and may end near the levels of 3500 - 3600. The subsequent wave '2' would be a zig-zag and would be deep.

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.

Shanghai Above 200DMA

Shanghai's SSE has broken above its 200 DMA. Weakness is to be bought in this index and a weekly close above 2460 will indicate the beginging of a bull market.

Intermarket Analysis

The last one week has been eventful for the western equity markets. In the last article it was mentioned that there are four major trends emerging.



Long term US bonds have formed a top in the last quarter of the calendar year 2008. Commodity market are now in a major bear market which will last for many years including sharp bear markets upside rallies. USD will continue to strengthen, not on risk aversion though. Equity markets may bottom out by H209.



The equity markets declined sharply in the western world and have made new lows. Emerging markets have remained quite resilient and are far from their lows made in November 2008. Accelerating deterioration in the world banking industry may lead all markets lower in the very short term. Intermarket analysis shows that the current downtrend in equity markets is decelerating but is not reflected in the equity market averages. Momentum studies are oversold but the trend remains to the downside. Equity markets remain a sell as the trend remains down, unless proven otherwise. But caution should be exercised as diverging signals are emerging from bond markets and currency markets.



Gold prices have performed quite strongly in comparison to all other asset classes. Gold has continued to move up even with USD holding onto its strength.



Risk aversion sentiment has worked well in favour of gold prices. The USD has seen lot of inflows as it is the least unattractive of the collection of ugly sisters that populate the world’s major currency markets. Gold has a tendency to give trend reversal in the first quarter of a calendar year. This is quite evident from major market bottoms and top that has been formed over the years. The only thing that can work in favour of gold prices now is the continued selling in world equity markets and deteriorating condition of the world currency markets. Taking a cue from the strength in gold prices it can be inferred that market sentiment in equity markets has touched lows which have not been seen in the last ten years.



Dow Jones:Gold (Dow Gold Ratio)



Equity markets rally in 1999 made Dow Jones most expensive as priced in gold terms. Currently this ratio is off 3 points from its long term average of 10. This means equity prices are getting cheaper in real money terms. This also means as and when stock prices make a cyclical bottom a lot of money will flow out of gold and into equity markets. The first quarter is just the time that it can happen as bullish sentiment in gold scales new peaks and bearish sentiment in stocks makes new troughs.



Now for this to happen, an early indication can be seen from a rebound in banking stocks. If the markets are to rebound, the financials should bottom out first. This would lead to a return to relatively risky securities and lead the gold prices down. This would also mean the USD will strengthen further as faith in the currency markets return to normal.



Continuing with the assumption that US 30 yr govt bonds have started pricing in some growth expectation, US equity markets can well give a sharp upmove after the current selling is over. However there is little evidence of any price reversal in major market averages in the US other than some oversold readings. Some important indicators to be analyzed are the relative performance of market majors.





Johnson and Johnson (JNJ) to S&P 500 ratio




Clearly JNJ to SPX ratio made a high of 0.070 in the bear market of 2000s. The high of this ratio coincided with the bear market low with a lag of 2 months. The stock market did decline by 40% in that bear market and moved up to make new highs. Although the current bear market is much larger in economic deterioration, still the averages would always kick in on a relative basis. There are other sectoral ratios which have gone beyond all previous bear market lows. One such ratio is the relative performance of tech stocks like Qualcomm. In the bull market the major tech stocks like Qualcomm were the first one to make a lower high before the big break came.



2009 bear market non-confirmation



2000 Bull market non-confirmation




http://www.federalreserve.gov/releases/cp/

The current stats from the Federal Reserve show very little activity in the CP market for Financials. Only Non financial with investment rating of the highest quality has seen some takers. This is in contrast to the rebound seen for financial CP markets ahead to the Dow Jones rally to 9000. The credit market for financial and sub investment securities is still inactive and this is clearly weighing on the market sentiment.

Commodity markets have remained relatively flat in the last one week. Industrial metals have seen a lot of selling along with a fall in the agricultural commodities. Grain markets have seen lot of price erosion and are still looking weak. Commodity index looks set to fall further and make new lows.



30 Year US bonds are consolidating and can continue its downtrend on a break below 125. The activity in the bond market is suggesting that a reversal in stock market is imminent. Equity markets have a tendency to lag by two quarters on an average. This gives us and idea that equity prices in US may find a cyclical bottom in the next few months.




Triangle breakdown in S&P 500 has seen rapid price erosion. Though momentum indicators are quite oversold, there is no indication of a reversal and the trend remains ‘down’ unless proven otherwise.



S&P 500 is now trading well below 2002 lows. A giant double top is also forming which shows weakness for equity prices in the long term is it trades below this level for another quarter.



USD index looks strong. Though there has been some short term correction, the trend still remains up. The pivot trend reversal remains 84 for the USD index.



In the current scenario, continue to look for weakness in equity markets across the world. Short term caution is warranted as divergences in market averages are reaching extreme levels. It is important to note that we have conclusively entered the last leg down of the current bear market in emerging market equities and the last leg down for cyclical bottom for western market equities.

Commodity prices will continue to weaken with agricultural prices leading the way down along with industrial metals.

USD looks strong. USD/JPY will give a strong upmove on a daily close above 95. Look for 102 to be tested as market has formed a cyclical bottom.

US 30 Year bond looks set to fall further on a daily close below 125.

Intermarket Analysis

This is the first article of a series that will be presented on intermarket relationship.



In the last 4 months the US stock market has held its range of Dow Jones 7800 – 9200. Present report shows that we may be very near to a break away from this range. The intermarket analysis generally relies on the following markets correlations.



To summarize the correlations -

Stocks and bond prices are positively correlated, bond prices (note: bond prices and not bond yields are mentioned here) lead stocks in both bear and bull markets.
Bond prices and commodity prices are negatively correlated; commodities lead bond prices by a small margin.
USD is inversely correlated to commodities; its leading characteristics have not been very strong.
A rising USD is good for US stocks, but not essentially for other markets like emerging markets in general (domestic currency strength is actually good for other markets barring few exceptions like China).


US Bonds have rallied strongly along with a fall in stock averages. This is not congruent with the intermarket analysis which says bonds should follow stocks. However the missing piece of puzzle is the previously held disinflation expectation and the deflation expectation. The four important markets have given a clear signal that strong deflationary expectation was built into the system. This is clear in hindsight as US bonds rallied along with the USD as a safe haven of last resort and commodity prices declined at a record pace.



In the current market scenario the US Bonds have started their descent which looks quite strong. My basic assumption now is that the US Bonds formed a top in December 2008 and has started a bear trend. This would be confirmed once the US Bonds Futures (USH9 Bloomberg ticker) trades below the 200 DMA on a sustained basis.



Taking the assumption forward that the US bonds have peaked we can come to the conclusion that the deflation expectation in the markets have reduced and the current USD strength is not based on a safe haven bid. Now put historical market developments into the picture.



L.A. Times article dated March 30, 2000, “The red-hot U.S. economy, powered by heavy spending by consumers and the federal government, was roaring ahead at an annual rate of 7.3% in the final three months of 1999, the fastest growth rate in nearly 16 years.” The US economy grew at the fastest pace and the US 30 yr Bond prices were rising at the time. Crude oil traded at a ‘very high’ price of $37 which lead the US President Clinton to tap the SPR. Every trader and investor was bullish at that time as NASDAQ led rally made higher highs even as DJIA had stopped making new highs.



Compare this to the present scenario. US 30 yr Bonds are falling, crude oil prices are near lows, US stocks are making new weekly lows and USD holding its strength. This suggests that the US Bond market is discounting growth. The positive slope of the US yield curve signifies inflation expectation getting back into the system. Commodity prices are generally the last to reverse after a major market trend. However the current bear trend in commodity prices in USD terms is strong and will take years to end. A stronger USD will lead to weaker commodities and stronger US exports.



Does this mean that the current financial crisis has run its course?



It would be very difficult to pin point a time for reversal but intermarket analysis shows that US stock market is in for a period of unsustainably lower prices. In the past, the US stock market has lagged deflation oriented bond market signals by more than 6 months. If the bond markets peaked in December then we are in for a lot of cyclical strength in the US stock markets. This could well mean that bonds may keep falling with stocks remaining in a range or stocks may rise relative to bond prices.



Stock market movements are not guided of this market correlation on a day to day basis. But over a period of time these correlation kick in and give strong cyclical reversal signals.



Currently the strength in the USD has been viewed as a ‘risk aversion’ rally. This has lead to liquidation in all the asset classes. In following graphs will show that USD is on the brink of a major bull market rally. It has gapped up today and can lead to strong rally if it manages to close above 87.65 today.



US 30 Yr bonds are declining and there is little to say unless they start trading above 131.



Commodity indices have made a H&S pattern and a next downtick can lead to lower levels.



US stocks have formed a major continuation pattern, a triangle which will resolve bearishly on an S&P 500 close below 805. Present index level in 825.



In the short term a rally in USD can lead to a strong down-leg for commodity and equity markets. This would be probably the last leg down for most of the Asian markets but just a bear market intermediate low for Western markets. With USD gapping up today there is an expectation that the trend in most markets will resolve in a day or two. In the medium term intermarket analysis is signaling a cyclical bottom in equity markets. But equity markets have a tendency to lag. If USD breakouts of this range, we would see a sell-off which will mark the low. S&P 500 will see support at 640 after 805 and 780 are taken out. This breakdown in US stocks would be against the intermarket analysis but short term lags cannot be predicted as market sentiment leads the market behaviour.

USD Index



US 30 Yr Govt Bond



GS Commodity Index



US stocks - S&P500

Market Mayhem - Triangle formation

The S&P CNX Nifty corrective pattern of the fourth wave which was expectedly forming a triangle is now in mature stage of formation. In the last update I had called for a 1000 point rally from lows of 2500 and market retraced the advance from 3147.

Current possibility has been throughly highlighted in my internal posts that market is forming a triangle which may take some more time to form. The graph below shows the current count on a one hour graph. It shows that current move is again corrective and in threes. 50 period EMA has kept price capped and the formation of 'e' in the triangle may end at 50 EMA which is currently at 2960.







Weekly channel is holding strong for the time being and looks to hold the price in it.



Point and figure graph shows strong support at 2489 which can lead completion of wave 'd'.



Momentum studies are weak and TRIX is also breaking down pointing towards further downside in days to come.




Look for prices to give a rebound to complete triangle by forming 'E' at around 2950.

2009 - Year of expectations!!!

Happy New Year to everyone. 31st December '08 gave me a feeling that finally the year is coming to an end. 2008 has been the worst year in living memory of most people. Some might argue that things can't get worse than this, but there is lot that has to be seen before we come to any conclusion. Lets just see what was good about 2008 -

• India did relatively well in Olympics 2008. We saw some new heroes emerging.
• Indian sports in general was very good. Golf, badminton, cricket and football had a very good year.
• Central government survived a confidence test vote
• nuclear deal - (long term impacts still in question)
• Launched Chandrayaan-1 from Satish Dhawan Space Centre, Sriharikota

and some other that I might have missed.

what did an average defensive investor gain in 2008?

• Stocks became cheap (after eroding much of the gains seen in the last three years)
• High rates on FD for long term investments, still available
• Better home prices

There were some unprecedented and mind numbing incidents that happened in 2008 which took everyone by surprise. Worst was the attacks in mumbai. Blasts in various Indian cities and many stampede which caused huge loss of human life.

In every sense the year gone by has been quite a shocker to most of the financial gurus and practitioners too. No one in the world ever imagined that oil would fall more than 80% from its peak in 5 straight months. Stock markets recoupled after failing to decouple and created a panic amongst investors.

Lets put things into perspective as the stand today. I would look at financial markets as this blog is about the markets.

First of all there has been some serious breakdown in intermarket correlations. In the last one year stocks and bond prices has moved in opposite direction. (Generally rising bond prices indicate lower borrowing costs and a positively sloping yield curves' presence leads to a rally in stocks, so bonds and stocks are positively correlated). Bond prices across the world first fell remarkably and then started to climb incessantly. Meanwhile stocks remained resilient initially and then sold off as bond prices started rising. So a serious correlation was interrupted.

Secondly, bonds and commodities showed a clear correlation as commodities fell and bond prices started rising. There was a one month lag in bond prices in some countries like India, which is good.

The US dollar gained 17% in last quarter or so. This lead to a fall in commodities which is also a perfect correlation. But a rising USD is in general good for stocks which didn't happen in 2008.

To summarize the correlations -

1. Stocks are bond prices are positively correlated, bond prices (note: bond prices and not bond yields are mentioned here) lead stocks in both bear and bull markets.
2. Bond prices and commodity prices are negatively correlated, commodities lead bond prices by a small margin.
3. USD is inversely correlated to commodities, its leading characteristics have not been very strong.
4. A rising USD is good for US stocks, but not essentially for other markets like emerging markets in general (domestic currency strength is actually good for other markets barring few exceptions like China).

Now this creates a question that why then stocks didn't rally as borrowing costs came down. The answer is the deflation expectation. Markets have been frightened by the expectation that price level would eventually fall so much that prices of goods and services would start falling year on year atleast for a few months. This was very evident from a number of factors. There was massive risk aversion in 2008 as bond price rally lead to yield going to zero for US3 month Treasury. The yields on High Yields (Junk Bonds) started rising and some were quoting a yield as high as 56%. There was a massive sell-off in consumption commodities like copper, platinum and agricultural commodities due to a severe fall in employment.

So what do we 'Expect in 2009' ?

All previous financial crisis like 1907, 1929, 1930, 1970 lead to severe legislation's in US. Like 1907 led to the creation of Federal Reserve, 1929 lead to SEC, 1970 lead to another set of regulations for funds. In India previous market sell-off has led to more regulations like crisis of 1992 lead to the creation of SEBI, then the scrapping of badla system, depositories etc. So its very important to be prepared to for regulations and see how the markets react to them.

Second is to judge whether the worse is behind us.

The US economy is weak and will remain weak for some more time. Unemployment in US would rise to levels of 8% or more, some more banks may fail. Currently following banks have failed. Click here for list of failed banks.

Imports in the US would remain low and western demand would remain sluggish. Some sectors like auto, housing and retail would suffer further damage due to a fall in demand. All these factors are well known now and markets have priced in most of the bad news already. As I wrote previously that reversal signs have started to emerge and we has quite a rise in the world equity markets post November. In fact Indian equity markets are also showing signs of resilience as Nifty is already up around 600 points from where a 1000 point rally was expected. See previous commentary.

The current market scenario shows that markets are indeed rising with some backing of improvement in market sentiment, flows in the credit market and a rising expectation of economic growth. One of the most important indicator that should tracked now is the long term bond prices. Since markets have started pricing in deflationary pressure than a fall in the long term bond prices will lead to weakening of the sentiment and reduced 'Panic Selling'.

2009 is the time to raise your equity weight age and reduce your holdings of bonds and debts. India FD rates are still attractive. However in bear markets there are several events that can create massive buying opportunities. One recent example is Satyam. So every major opportunity should be used to buy sound companies with 10 years of more of stable earnings and a PE of less than 15. Any event that leads to a sudden dip the stock prices of firms which are strong from a business point of view should be bought and kept for few years.

A few caveats - 2009 will bring opportunites but with large risks attached to them, so be ready to evaluate the risks before taking a punt. Inflation may rise again as commodities make an interim come back, stocks might see a final bottom in place in the US along with a relief rally in commodities. Indian markets are better placed in terms of financial health but worse of in terms of investment flows, geo-politics and the stability of the government.

In 2009

Expect cheaper goods, eating joints which increased the prices of food and edible items during last year inflation has not decreased the rates yet. This can happen in few months. Cheaper travelling, better media entertainment and better security might make your weekends.

Happy New Year

Reversal Signals emerging !!

Stock market crashes always leave a staggering amount of traders, speculators and others which take vow of never to return to this markets. Bear markets often make stocks speculative and the art of investing, a gamble. History gives us great insight into the mind of 'the crowd' which shows the various points of market indecisiveness.

There has been many instance where firms which were too big to fail, failed and left investors in lurch. It happened with the telephone stocks, railroads, over-leveraged arbitrageurs of 1980s, technology stocks, real estate and now the auto manufacturer. There is a very important lesson in all of the failures that they have something common. All market participants knew that the physical growth in volumes of there business is a given. It was in fact true. Just see the numbers for the aviation sector by clicking here .

However the aviation sector worldwide has lagged the market for decades and has given very poor return. Real estate boom and bust cycle is far more prevalent and pervasive. In the bull market the expectation of growth is taken as a proxy for growth in profitability and gives fuel to the bullish argument. When traders and investors realize that the profitability is very low, there is a rush to sell stocks at any given price. The age old fashion of asking 'how much' to pay for the stock can be of great help in finding correct sectors to enter.

The Dow Jones Industrial Average has been in a bear market since the begining of the 21st century priced in terms of gold. Take a look -

Source:www.chartoftheday.com

The real test of the current bear market would be at the Dow Gold Ratio of 9. It has not traded below it after the gold window was taken out by Nixon. So if the conditions become worse than they are, this is the indicator to look forward for an early warning. The high yield bonds have been falling in prices and the spread on High Yields have gone out of proportion rising a staggering 770% in one year. But it has bounced of quite substantially in the last few days. Take a look at the High Yield Select Bond Index of 10.

Source:www.stockcharts.com

Any rebound in this index will arguer well for the stocks in general. Now there is an important development that has taken place simultaneously in two different markets.

A - The USD has broken down forming a head and shoulders pattern and a failure of the fifth wave.

B - The commodity index is very near to a breakout.

Take a look at the CRB index divided by the USD index -

Source:www.stockcharts.com

If this reversal holds than it would put the deflationary theory to rest and will give some respite to the continues asset devaluation taking place. The USD has broken down from a head and shoulder pattern and is falling steadily.

Source:www.stockcharts.com

As I have already pointed out that crude oil has bottomed out for the short term and heading higher for some time, it is important to be cautious of the USD index as a reversal in USD may lead to a fall in all commodities to new lows.

USD has been acting as a gauge of the sentiment and a higher USD was showing risk aversion and stock fell in line with it. In the short term the correlation of a stronger USD and stronger equity market is broken. Risk aversion sentiment is ruling the markets. A stronger USD is important for US equities and will lead to stronger growth in world equity markets also. This correlation can give early leads into the markets.

These factors are giving some clues about the strength of current bear market. The economic conditions will worsen even more and more bad news comes in bunches. The stocks however look forward and a fruitful recovery will take some more time.

Indian stock markets have given a small rally of about 7.4% in the last one week. I mentioned in my previous post that this rally can last for about 1000 points. But there are signs that this rally lacks strength as the upmove are not showing impulsive behaviour. S&P CNX Nifty will face strong resistance at 3250 and the inflection support now stands at 2810. A close below this level would take markets lower.

The next two quarters would be the best time to accumulate high value, high dividend yield stocks. Markets would stretched to the downside and give investors the real time to buy which is the best thing about bear markets.

Market Mayhem - rally coming!!!!

S&P 500 just crossed the 910 mark and may well close above it in another half an hour as I am writing this. Dow Jones Industrials has completed its inverse head and shoulders pattern and as I wrote earlier, the October lows did hold quite remarkably in nearly all the markets.

. . . . . . We remain in corrective short term abc of down 5 wave impulse ‘C’. The corrective wave ‘a’ and ‘b’ have ended and we entered the wave ‘c’ on Friday. This may take markets up to the 3500 to 3700 . . . . . . . . On a risk reward basis, it would be favorable to go long with a risk level below 2490 for a sharp upward rally . . . . . .

Indian markets have been quite subdued in the last few weeks due to the terror strike and political uncertainty. The latest slew of measures by the government and the RBI are encouraging as market tops and bottoms are ofter formed when some constructive steps are taken to stimulate growth. I have been quite bullish for this 1000 point rally for quite sometime now. But the time this rally is taking is making me a bit skeptical about it. Though the price formations and still not bearish in the current wave pattern, there are enough red flags to warrant attention. Nifty should close this week positively above 2900 for this rally to last and reach 3500. If this doesn't happen we may well form a triangle in the corrective fourth wave which is in progress.

There are some sectors which warrant attention now. In all likelihood real estate sector in India has seen a bottom. When I say this, it doesn't mean that home prices would not correct. It means the real estate sector stocks may well have seen the lows or are very near to the lows.

There are some important levels in Nifty to watch out for. If prices are able to trade above 2900 and post a daily close, there would be a rally to at least 3200. Important support now stands at 2680. 2865 is the short term hurdle for this rally to gain strength. Next upturn should be swift and sharp and should be on high volumes to confirm the personality of wave 3 in wave c of corrective wave 4 of c of ABC. Get out of gold if it closes below $740. Crude oil may have formed a bottom, 'at last', if it doesn't breach $39.6 on even an intraday tick.

December may give some respite to the bulls.

Market Signals

The USD Index which measures the performance of USD against a basket of currencies has shown a visible negative correlation to equity markets and metals markets. The strengthening USD has been a direct consequence of flight to safety to the US treasury. The money market has improved as lending in overseas markets have again started though the rates are still on the higher end as compared to the benchmark US and Euro Area rates. The TED spread is now hovering around 2.18 percent.

Intermarket analysis shows that a strengthening USD is bullish for US equities. The other leading factors being rising bond prices and a crash in commodity markets. In the current scenario we have three set of factors which are inline with the historical activity.

The US 30 year bonds have rallied strongly showing that US will maintain 1% or below interest rates for next few quarters. The USD has entered a strong upmove, which can last quite a while, though long term bearishness is still in force. Commodity markets have topped out with the exception of gold and crude oil. It is highly likely that we may have already seen the top for most of agricultural commodities for the next one decade.

All this points out to a few important factors. Low inflation, cheap credit. However an important issue for commodity driven emerging markets is the strong USD. Most of the commodity driven EMs like Brazil would not do great in a rising USD scenario. The best of the lot from emerging markets is India.

I think the equity markets may give a strong rebound in the short term can can spend a lot of time in the counter trend rally of the present bear market. The bear market has not given a convincing sign of a final bottom. However, I feel the negative correlation of rising USD and falling equity markets might break in few weeks as risk aversion takes a back seat. We may have formed a low for this month today, only time will tell. DJIA looks set to give a strong relief rally if prices hold 7950 on closing this week.

Gold now looks an appealing sell on a rally to $790-$810.

Zinc may form a reversal pattern in few days, watch it carefully.

Market Mayhem - Trend

Previous market alert

Long term

Long term trend in Nifty remains bullish until prices remain above 1200. We are in a corrective 4th wave of primary uptrend. Current price move can be divided into 61.8 and 38.2 of the entire move. Currently Nifty is trading below 61.8% of the entire motive wave. The lower degree fourth wave ended at 2600 and Nifty has bounced back twice from the same closing level.



Medium term

The correction that began in January 2008 is unfolding into a Zig-Zag. The current move is the wave ‘C’ of the corrective Zig-Zag ABC. We have already formed wave 3 of wave C within ABC. The corrective channel formed in May is still holding the price with a one week aberration.




Short term View

We remain in corrective short term abc of down 5 wave impulse ‘C’. The corrective wave ‘a’ and ‘b’ have ended and we entered the wave ‘c’ on Friday. This may take markets up to the 3500 to 3700 which is the termination of 4th wave of one previous degree. Markets would eventually make a new low before the current down trend ends. An alternate count exist which shows that market can make a new low if it falls below 2490 in the next one week. On a risk reward basis, it would be favorable to go long with a risk level below 2490 for a sharp upward rally. Markets may test level of 2630 in the next few days before the next rise.


This count would have to be reviewed and adjusted if market closes below 2490 in the next two weeks.

Is the trend tiring

The USD index which gave an important breakout a few days back has seen volatile moves in the last few sessions as it flip flopped between 88 and 87. The break to the upside should lead to significant rally in the next days or trading sessions. If it is able to trade above 88.2 there would be a strong rally in the USD index to well above 90.

Take a look at the graph -



For the Elliott wave count refer to the graph - USD Index wave count

It is interesting to note that the USD index which is in general positively correlated to US equities is now serving as an important gauge of sentiment. A rise in USD has been accompanied by a fall in various stock market indices in the last few weeks and a make or break day is getting closer. In the next few days either the market would test its lows and recover significantly to its major resistance levels, like 11500 for Dow Jones Industrial, 1000 for S&P, 3500 for Nifty, or it would lead to a severe price erosion. I think the market internals are pointing towards a global rally that will take all participants by surprise if DJIA is able to holds its October lows on a closing basis.

If markets fall in the next couple of days and reach important support levels, there would be good opportunity to the upside in next one month. We are entering a strong seasonal phase in the next week and this can lead to a significant rally in the markets. So buying on any dip with October lows as risk levels may serve very well.

An alternate count scenario

Elliott wave count on Nifty has been quite confusing lately and there are a number of ways to put it. As i had put up a count previously which shows we are in 'C' of a zig-zag, i see another count possible. While discussing the pattern with a friend, this pattern seems to make a better understanding of the count.

The alternate scenario says we are in a double zig zag corrective pattern. The current leg is the wave 'b' of the ABC corrective and we are forming the 'c' wave of 'b'. The current wave might take markets to as high as 3500 to 3700 and then make a new low. Which would initiate the formation of wave 'c', the final leg down of the wave pattern. Have a look -



This count suggest that it would take another 6 months for markets to bottom out if a=b in time and c equals a+b which holds true in general market conditions.