Bearish NIFTY

I always say that the stock markets are always the same. This time they are a bit different in a limited sense only. But surely whenever they fall, they leave investors with the same emotions each time.

This time the stock markets are different because of some of the factors listed below:

a)    There is a huge liquidity in the market caused by domestic inflows of mutual funds (which is there every time) but this time the figures are being rolled out - something like a specific feature/ technology of a product being used as a USP for selling it.

b)    The general investors are so optimistic about the bullishness of the markets that they have stopped believing that the markets will ever fall. The S shaped cycle models have been successfully deleted out of the mind and memory of the investors and from the books of economics and marketing. Instead the disruptive valuation models are masking the true state of affairs of the markets and economies world over. The PE ratios and growth rates have lost their relevance or are at an acceptable stretched levels as per the newer norms of the global economies.

c)    The markets have been moving and inching up gradually. Each dip in the past has led to a bounce back higher than the previous highs and the markets have moved on thus.

d)    Every investor is upbeat about the mutual funds keeping the markets afloat and each mutual fund investor has become savvy about investment jargons like SIP and STP. Honestly there may be a few more that I am not familiar with.

e)    Factors like geo-political and economic tensions in Asia (North Korea and South China Sea), Middle East (ISIS and attacks in Syria) and Europe (potential financial default by Greece, annexation of Crimea), just to name a few have been ignored by the stock markets or speaking in a reverse sense, the stock markets and fund managers have never let these events affect the markets. Any negative news on the stock markets has been effectively managed by the media/ respective governments.

This time the paanwalas will not be given the privilege to determine the time of fall of the stocks. It is a general saying in the stock market circles that when the paanwalas start giving stock tips to their customers, it is time to exit the markets.

But this time around, the growth story of India is being attributed to two recently undertaken initiatives of demonetisation and GST by the government. These initiatives will definitely turn in positive results for the economy in times to come, but labelling these initiatives as USPs for the growth story is something which is a matter of concern. These measures will bring in improved transparency, good governance and gradual alignment of the unorganised sector/ parallel economy with the mainstream economy.

If vague factors like Digital India/ Start-ups, demonetisation, GST and may be a few more can be termed as the key differentiators of the growth story of India, probably there could be as many other vague factors/ triggers for the bearishness of the Indian indices.

However, there are a few factors which cannot be afforded to be ignored:

1.    Month after month, the foreign money is being pulled out of the Indian stock markets in big quantum. One gets to hear arguments that the Indian mutual funds (please refer to point no. d) above) are pouring in thousands of crores of money into the stock markets.

We are by any standards still very small in comparison to the amount of money invested in India by the Foreign Institutional Investors (FIIs).

2.    A highly probable rupee strengthening (media and news reports speak of contrary) can shave off extra margins from the export earnings of the industry. The software giants may see a straight impact on the EBIDTA margins. For example, a 5% hardening of rupee against USD, will straight away knock off EBIDTA margins of exports/ USD earnings by 5%. This may or may not happen.

3.    A 0.25% increase in interest rates by Fed this year and expected four straight increases in 2018 might lead to a stagnation in the housing sector of the US due to increase in the EMIs (lower disposable income) and in the industrial/ commercial sector due to increased cost of capital, higher payback periods of projects, lower borrowing capacity due to fall in interest coverage ratios, lower capital expenditure by corporates, etc.

A third increase of 0.25% during 2017 is on the cards in the current quarter and the Fed has already indicated unwinding of the balance sheet (shedding off its assets) in a planned and predictable manner starting October 2017.

The Tax reforms passed by the Trump administration, as seen by the performance of the indices, have failed to enthuse the markets.

The next meeting of Fed is scheduled for December 12-13, next week. It will be interesting to see what direction do US and other global indices take post conclusion of the meetings and announcement of the policy decisions by Fed (announcement of the expected interest rate hike).

Two different variants of NIFTY multi-period candlestick charts have been given below for the readers to take clue from.

For the two multi-period candlestick charts (two monthly) shown above, there is one which coincides with calendar months and the other one which doesn’t. Both the charts indicate bearishness. The last candle on the chart where the multi-period candle coincides with the calendar months gives enough indications of bearishness of Nifty. If NIFTY goes down, it confirms bearishness. If it bounces back and goes back to the opening point or above that, it forms a hanging-man pattern, which is again a bearish indicator.

Best wishes to the readers for the festive season and New Year.

The author can be contacted at: riskadvisory@outlook.com.

DISCLAIMER:

These extracts from my trading files are for the purpose of education only. Any advice contained therein is provided for the general information of readers and does not have regard to any particular person's investment objectives, financial situation or needs and must not be construed as an advice to buy, hold and sell or otherwise deal in commodities, currencies, indices, securities or other forms of investments. Accordingly, no reader should act on the basis of any information contained therein without consulting a suitably qualified financial advisor in the first place.