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State of the Markets

September 1, 2009

It’s weird. Day by day nothing seems to change, but pretty soon, everything is different.

-Calvin

Nothing perhaps could have been more reflective of the present day, than this innocent comment by Calvin, the ever charming day dreaming kid. A few months back, NIFTY was a 2500,Sensex around 7000, blood on the streets,a bear run in full fledged swing, SPX at 13 year low. Today, people are calling it the end of the bear run.

AIG stock has rallied 300%, and is even mulling the part return of government debt. There are commendations and laurels heaped on Ben Bernanke, Hank Paulson and Timothy Geithner. (Heck! I dont have anything to complain as well, I am up 47% since March) but its when complacency sets in, confidence that the only place market will move now is up and life is great, is when you should be cautious.

I am not here, to shower philosophical addresses on you. I would like to present something else. Some important views, which might, if god helps, lay the foundation of whats going to happen next. But before which, I would like to present a few cases.

Lets have a look at NIFTY charts since the beginning of the year.

NIFTY - The Last Six Months

NIFTY - The Last Six Months

Though, I am not much of an indicator man, but I better listen to it, when its telling me a contrarian signal. Finding contrarians is difficult enough, and I am not going to lose one. As readers of this blog, might have an inkling, I am a die hard contrarian. Because I sincerely believe, that this is one place, where the majority is always penalised to reward the minority. And that explains wealth distribution six sigma, eight sigma away from the norm. Being contrarian has its own pitfalls, but at the end it always comes up at the top.

Today Indian markets are in a very frothy state. The soft mushy mushy feeling of the investor, who thinks the nightmare is over. And markets are here to make him rich. I think this is one of those times, when market has been an extremely gracious, giving off a huge broad market rally. The question is not this time, how to take the trades or where to invest, but can I get some more money(because it really doesnt matter, where I put my cash, its gonna go up!). The contrarian in me , says this is bad, because everything is so good. And when I see, a chart like the one above, consistently validating this post (read the ‘Today’ subheading), my belief gets stronger.

One glance at the chart, shows me prime weakness. Coming back to what I mentioned above, the indicator. Two tops, almost the same level, made within a month, has knocked off a lot of strength from the system. RSI is currently tapperring off and August highs were nowhere closer to May highs, and Aug 29 high is no where near to Aug 3rd high.

Make no mistake, we are in for some serious pain, but what kind of pain is to be seen. We are going down, by how much dont ask me. Your guess is as good as mine(but you might like to read, what I think on the “Tomorrow” version of “Watching the Tape” );

This is what, if you indeed see, NIFTY and Indian markets in isolation. Let me post a slight, bearish chart. Right now as we speak [22:41 IST,1:12PM ET], SPX, DJIA and NDQ-100 are all trading with a cut of 2.0 pc to 2.5pc.The yellowed out bar shows today for SPX

SPX- 6 Month and History

SPX- 6 Month and History

We are again seeing a similar pattern, and SPX is testing with its full force the trend line. I have run up an assumption that the breach of the trendline in July is not really a breach. Usually, markets seem to have breached trendline, on charts, but not really as per the markets.If you work with tools like computers and accurate tools like trend lines etc, you might see a slight breach here, a slight breach there but its just a markets way of saying “okay, not really” type of a move. So if we indeed make that assumption we are able to fit through two dips, and I guess its better than not assuming and passing it through only the July dip. If it holds 1000, some jaan might be left in this rally, but again RSI is telling me, “Sorry brother no go!”

It seems this rally is built on way more shifty sands than what I thought it to be.

And now the grand daddy of all bearish charts. Shanghai!

Shanghai- Screwed Up!

Shanghai- Screwed Up!

Note the divergence! Note a feeble support taking action on the long term upward biased trendline, how the price is resolved and once its resolved, note how the very next day gapped down significantly. There was though a half hearted attempt at retest of the trendline, but retests like this in environment like this, with a momentum so screwed up and bears in such a frenzy, it met the same fate as bulls are having. The attempt at rally died a premature death.

Now the point essentially is, what next?

I am seeing extremely similar patterns all over the globe. This rally is dying a quick death. And momentum is flying away faster than you can say “Short!” Clearly Indian markets are rallying, midcaps are pulling the index up, and a fresh lease of life, the IPO market has received in the previous 2 months. And very sadly, I see a sort of “decoupling” happening between whats reality and whats the truth. And mind you, two years back , decoupling was celebrated. But let me tell you, decoupling is never good. The markets never decoupled. You were just crazy enough to believe it did. And euphoria induced craziness is never a good thing, Monsieur.

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