Ok guys sorry for the delay in my posts. I have been out of the market for the past week. I liquidated my entire portfolio during the current week. I was bullish on the market when the dow made a bottom @ 9775 and started to rally. However, the unbelievable amount of time that we have spent going down and not able to clear the highs on any world indices were a cause of concern and then the sudden fall on Tuesday when the Italian Job numbers came out made me exit the markets completely. The most important part for any trader is capital preservation because if I have cash I will live to fight another day.
I expected consolidation this week in all the global markets but infact apart from Indian markets and a few more emerging markets, the Western Stock markets have again ended the week in deep red. If the earnings are going to be stellar the way which Goldman Sachs, JP Morgan etc predict then we should see a rally soon. However, the price action on the stock markets is giving a completely different picture.
I am not of the view that we will have double dip recession or we will retest March 2009 lows for our market nifty, we made a bottom in October 2008. However I expect that this recession is no different from recessions witnessed globally in last 10-15 years. In 1998 after the Asian Crisis and LTCM we went into a bear market we rallied out of the bear market for 1 year and then we had a correction of around 30%. For me most interesting thing is that in the last 2 decades with every bull market, when it starts to mature into a bull market, it has a correction of around 25%-30% the year of this correction usually has been an even year(1998,2002,2004,2006 and 2010). However, this must be treated as coincidence. Every 'even' year has had a decline in May since the year 2002 on all the world equity markets(this is how far back my data goes). It applies to Dow, FTSE, CAC, DAX, Nifty, Shanghai Comp, ASX 200 etc.
Ok the reasons for correction during the bull runs in 1998, 2002,2004,2006 etc was there comes a phase in the bull markets especially during the early year when market participants start doubting the recovery and expect a slow down this is what has been happening right now in addition to the negative news from Europe. Good news are not taken into account but bad news are immediately priced in.
Whenever, the markets have fallen in May in the even years, the market has closed the year relatively flat to mildly positive(10% positive) same can be expected this year and this is what the recent reports from Big Firms such as Goldman Sachs, JP Morgan, Citi etc points to. They expect a target between 4950-5450(65% probability) on the nifty by december, target of 6000+(20% probability on the nifty) and below 4500 (15% probability- a bearish case scenario) , Similarly for S&P in US a level between 1100- 1250.
Very interestingly recently I came across a research report from Morgan Stanley dated 12th April 2010 which advised sell of global equity markets due to Europe and they expected crisis to worsen. At the time when the report was published all the European Indicies were at 52 week highs. According to the report the MSCI Europe Index was trading @ 1455 in April when the report was published and they expected a correction first level to 1170 and then if the bottom is not formed a worst case scenario for the index to bottom out at 1050-1070 levels. We formed a bottom at this level of 1170 perfectly 2 weeks back but interestingly we have again reached the same level yesterday. The current value of this index is 1163. Interestingly this also comes close to 19.35% correction Year to date. So the target of 1050 which is almost 30% down move form the peak falls perfectly in line with the previous bull market corrections.
For me, although our index has rallied a lot from the bottom I am not confident to go long is because of the price action in commodities. Copper has fallen of the cliff. From 360 as a peak to 280 today the correction is huge. Similarly for crude it has breached Feb lows and has made a lower low. AUD vs USD a strict indicator of risk has also shown a lot of dumping of hedge funds favourite currency Aussie dollar. The fall in Aussie dollar when started was similar to Lehman collapse however, it is finding support at these levels for the past 2 weeks. EUR is making a new low every week which is also worrying. Dollar Index is rallying and every correction is being bought into. Until the dollar shows weakness and trades below 85 the dollar index we will see weakness in the equity and commodities market. The most stunning fact is that Dollar Index is trading very close to 52 week high levels last seen at Lehman Collapse when the crisis began.
The outflow of funds from Equity markets has been huge. Liquidation of Portfolios has been witnessed in all the global markets including India where the DIIs+FIIs flow in the month of May has been negative for a first time in many months the overall outflow from Equity market has been around 7000 crores which is a massive number. Similarly around $20 billion worth of fund flow has been witnessed in US. The long positions witnessed in the beginning of the month is attributed to mutual funds who buy the market in the first week for systematic investment planing investors and similar type of funds. I am attaching a few charts below. In summary the picture on the global equity markets is to be very volatile and driven by news and market sentiments. The best thing would be to stay away from the market unless a breakout happens on the downside or upside. 5150 on nifty remains a major resistance and 5200 cross of which will confirm the trend reversal to the upside provided nifty manages to close above it for 2 consecutive days. On the other hand the Dow needs to close above 10450 levels to signal a bullish upmove however, recently it has not even crossed 10,300 successfully. If anyone wants to go short can do so with these mentioned peak as stops. However, if you are a trader who live on small profits stay away from this market as the volatility is such that the 100 points move are nothing and around 200 points of wild swings are regularly witnessed on the dow. Volatility is here to stay. Next week will be very interesting however besides nifty none of the world markets have shown strength. For me Nifty is in the downward slopping channel and has bounced of the top today from 5150 levels and I expect it to go down and touch the lower channel before breaching it to the upside. Even the Stochastic is showing overbought.
Copper clearly shows a bear market:
Char 2 copper: