Some of you might recall a technical view posted on this blog some time back
http://worldoutofwhack.com/2018/10/06/technical-analysis-of-indian-markets/
He was kind enough to give me an update and allowed me to share it with you..
Here’s what Neppolian is looking at:
1. Indian indices, both Nifty and Bankex, are recovering from a good support level of 10 QMA. In my experience the first drop to 10QMA is always bought into and capable of producing a rally with or without any policy measures by the government (in this case a tax rate rationalisation).
2. However, I also note that prior to this rally both the indices had effected a widely followed measure of bear market definition called a “death cross” (50dma closing below 200DMA). This condition still persists even after a 10% rally in the indices. No one seem to be minding it. Any which ways I follow a more longer term measure of death cross (100DMA closing under 200DMA) to signal an onset of a bear market. This is the reason why markets actually rally even after publicly followed death cross settings of 50dma <200DMA condition.
3. Markets have reached the most important area of resistance 11600 in Nifty and 31000 in Bankex….this is the area defined by the election results day (23rd May 2019) gap. Please note that the indices had embarked on the June to September collapse only after falling under this gap post forming an all time highs in the results euphoria. So it is pertinent that the indices must eclipse this level of 11600 and 31000 on a monthly close basis for furthering the positive bias.
4. Even today 66% percent of Nifty constituents are Trading with a conventional death cross of being 50dma <200DMA. On my measure of 100DMA <200DMA 40% of Nifty components qualify. These are weak settings suggestive of a capped upside potential.
5. The ratio line of large cap v/s midcap index, still is tracking in favour of large caps. So a broad based rally may remain elusive till the ratio line decisively shifts in favour of midcap. A bull market in my sense is defined when midcap outperformance rules.
6. However we can remain open for a furtherance of rally to the past all time high of 12100 if the following developments appear:
a. The conventional death cross condition is reversed in both indices ( if 50DMA >200DMA comes true).
b. Midcap outperformance starts
c. In all future correction if any, Nifty holds above 11200.
On the global level, the 20 year cycle top measured from 1999 top to be ending in 2019 is yet to play out. We have 3 more months for this top to be put in. This could happen in the coming 3-6 months in parabolic fashion to seal a top or failing which we can assume that markets may have already topped. A falling USD, which may come true if USD index cracks 92 can give fillip to a commodity fueled /inflationary sympathetic parabolic rally in equities to end this long term cyclical top. Ideally next 3 years from 2020-2022 should be a down cycle for risk assets including equity. When this global down cycle plays out India will follow suit down along with global markets. The only missing piece in global recession possibility is the absence of commodity fueled inflation. Let’s see if it plays out.
Obviously, the big question to ask and answer is whether the cyclical top doesn’t come at all or gets extended in time because of unconventional policies of global central banks. I get asked this question umpteen times in a week. In my experience of cycle studies, of the past 125 years, long term cycles have never failed…they may get extended by a quarter or two but not fail completely.
Even as this cycle is yet to played out globally, indian mid and small cap sectors and some select large caps have clearly seen this cycle effect playing out for the last 18 months. Most midcap and small caps have lost 50-80% of their peak value. I have never seen so many corporations going bust in any of the previous cycles. Nifty holding up higher levels have been a mirage. The pain suffered by mid and small cap portfolios of even well diversified mutual funds have been colossal. I have personally witnessed absolute clueless state of PMs in the past 18 months. The best names have lost. Hope you remember, my 2018 year report highlighting a new proprietary metric that red flagged Indian mid and small cap indices along with Dow being in bubble territory. Rest is personally witnessed by you and me.
In spite of these trying times, I must confess that long term bullish settings (8+ years) remain intact in Indian shores. I feel in the next cyclical bull market to begin from mid 2022, India will hugely outperform global markets as lot of kitchen sinking is done now and the govt policy will continue to press on ethnic cleansing of dirty corporates.
Next cyclical top is likely in 2026 (8 years from 2019) and a much larger cycle top in 2035 (16 years counted from 2019 encompassing two 8 year cycles).
Hope I have given near, medium and long term views here.