Fortnightly Market View: Still Cloudy

Markets are headed higher but buy only on declines

Another fortnight is over and the short-term top of 15th April has not been scaled as yet. But is a trend change at hand? Two weeks ago, I had suggested that “if the US goes down by 10%-15%, India will not stand tall; it will go down too, quite sharply as we have repeatedly seen. The US market seems to be headed down again at the time of writing.” However, the Indian outperformance continued.

The US market and the Chinese market did go down last fortnight but the Indian market hardly budged. Indeed, it has traded in a very tight range over the past three weeks and is now about to head higher. The Sensex had hit a high of 17,919 on 21st June. It hit a low of 17,373 on 30th June and closed this week at 17,833. Investments by foreign institutional investors have been robust; although, as the market has headed higher, their net investments have come down to modest levels.

Last fortnight, we had said that the Indian market was reaching a high of its very short-term cycle. The market immediately declined and then stabilised. A new short-term global rally has started and the market is headed higher. There is a likelihood that the short-term high would now be around 18,300 on the Sensex. If it crosses that, we are in for a major extended rally driven by global liquidity that would defy all logic. On the downside, the lines on the sand for the bulls to defend are at 17,300 and then 16,500 on the Sensex.

One of the reasons for the market heading higher is that the global markets have stabilised now after the savage fall of May and June. The Chinese market had declined 26% and the US market by 16%. Their recent stability has boosted all markets around the world. But note that neither of these two major markets (US and China) is back on a long-term uptrend. They may decline again in a month and a fresh, more serious, downturn will start in India as well. We are sticking to our view that the Indian market is, ultimately, not insulated from the rest of the world.

The trend of global markets will depend on where the US economy and markets are headed. Here is an important indicator. According to The Economic Cycle Research Institute, a New York-based independent forecasting group, which has a very good record of forecasting business cycles, economic growth fell to the lowest since July 2009, indicating that the economy will continue to slow. Its Weekly Leading Index fell to 121.5, the lowest level since July 24, 2009 (120.3).

We expect that after a brief rally that is currently under way, global markets would swoon. Hence, to participate in the current upmove, buy the declines, not the momentum and run for the exit fast.

Beginning this issue, we are putting out only medium-term and long-term forecasts. Short-term forecasts will be available in our daily market coverage on our website. This is because the market has been highly volatile in shorter-time horizon and, by the time you receive the magazine, a short-term trend change would have already happened.

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