Thursday, May 21, 2009

Changing Trends - Changing Fast?

Dear Readers,
I had been maintaining that markets in most part of world are in uptrend and then came May 6 and I posted my WARNING on seeing some interesting developments on charts. The levels for S&P 500 and Nifty Futures (929 and 3730 respectively) I posted that day remained not even touched and unbroken. But, then came Monday, 18 May. There was this BIG DRAMA in Indian Equities markets and a new chapter in history was written - First time ever in Indian history of equities there was a circuit up! The ostensible reason was "central election results in favor of a stable govt". That day what happened took almost everybody by real surprise. All pundits were expecting anything but a clear mandate to Manmohan Singh and Soniya Gandhi led UPA. What was real surprise was that Indian National Congress party had more seats than expected, giving it the power required to do what they want, rather than so many small allies having constant pressure on day to day work of govt. While there was no real fundamental change in economy on that day, the very expectations of stable next five years (read hope or greed) led to that kind of historic day in Indian Markets. If something of that magnitude happens then no chartist can have real explanation...

This unnecessary drama in Indian Markets has washed out all signs of "oversold" conditions on even long term charts and now we see Indian Indexes almost 50% recovered from last year's fall. Remember, the historical upper circuit on Monday could be a dangerous sign - how many times did you see such big moves on the upside during bull market? as my friend Abhijit says - Bull Markets have circuit downs and Bear Markets have big up moves. The historical circuit up only worsens the situation and whatever positive outlook I had in Indian Markets has been washed for the time being. This can be a preface to a long scary story.

On the other hand S&P 500 once again tried to conquer my 929 level last week but it failed again. I have so far been proved right about it and I strongly hope that my advice of "top formation" did help my readers, so far. It also bounced from 870 odd level which my important support and if it managaes to break down below that, then this bear rally will be history.

Now let me take this opportunity to bust the myth of greener pasture that Indian "investors" have. They have jumped to the conclusion that this election result has paved way for Manmohan Singh to kick start economic recovery and worst is definitely over as there are no left parties to threaten development. The above conclusion is not my imagination but a result of conversation with some clients of our brokerage as they started calling me on Sunday the 17th and asking for how they can buy on Monday morning so that they are not left out. I told them there was virtually no possibility of buying on Monday as the Euphoria was expected to hit upper limits. Also, I told them even if they can, they should not. My reason was simple - euphoria don't last long enough to make you any good profit. Those who had gambled on Friday and had open positions did benefit tremendously but you can't praise gambling even if it made you rich.

Coming to the reality, there has changed NOTHING that justifies a possibility of strong growth returning in at least next two years. This crisis in global economy can not be "cured" by an economist Prime Misnister of India alone. If it were a usual cyclic downturn then govt could do few things to manage but this time its truly global with systemic meltdown! The entire economy of world is in danger of being torn apart due to massive leverage and the deleveraging process has only started! This chart from shows what is the state of Global Trade!

India, however strong, can not post those 9% GDP growth figures in such circumstances.

Then comes the govt plans of massive infrastructure expenditure (fiscal stimulus). Somehow people forget that real money is required for any project even if it is funded by govt and govts anywhere in the world except US can not run deficits beyond certain limits. US exception owes to the reserve currency status of Dollar but even they can not run massive debts forever, at least when the system of "US buying Asian products, paying them dollars and Asians buying US debt with those dollars" is collapsing. China, which is the biggest buyer of US debt is "concerned" and already showing signs of pulling out from this "burden" (buying gold and signing agreement with Brazil on future trade in their currencies instead of US Dollar). Germay, Japan and UK, the big economies are down 14, 15 and 8 % this quarter! How can one imagine India returning to past growth rates ? I will be pleasantly surprised if India can grow even by 6% in next two years at least. And this scenario does not make any case for investing in Indian Equities at such high PE ratios.

Markets try to be rational but the fact is they are not. They are run by emotions more than true fundamentals as people usually think. They try to discount future but exaggerate some times and prove wrong other times. That is the reason we look at charts for trading rather than looking at fundamentals but what this week has done is a good distortion of charts to the extent that we will need at least one more week of stabilization in price pattern so that charts restart functioning properly.

Let us hope the masses do not remain out of sense for long...

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