Indian market currently is comparable to a chess board albeit with only king on it. By King, I meant Nifty. Nifty is the only index which is holding on for 2013 compared to Mid-Caps and Small Caps. While, Nifty is flat for the year, Small Cap and Mid Cap Indices are down 7.7% and 9.7% respectively. Many stocks are down quite sharply between 20-40%. Betas which lead the rally post June 2012 lows have been beaten out of shape in 2013. While many are calling start of bull market with all sorts of explanation, Inter Market relationship, market breadth, etc indicates completely different story. BEGINNING OF BULL MARKETS ARE ALWAYS KNOWN IN HINDSIGHT AND CERTAINLY NOT WHEN PAID EXPERTS ON BUSINESS CHANNELS CALL FOR.
I have already discussed in previous posts (early January 2013) volume and price action in small and mid caps was clearly indicating signs of Top. I will not venture into volume picture in this post. Rather will try to understand what can kill our last man standing i.e. Nifty. If not for strength in global markets, Nifty could be staring at very different levels.
Global picture hardly indicates RISK ON BEHAVIOR.....
1) Among the major markets considered for analysis, closer look at Top 5 performers reveals the nature of risk on behavior. For the purpose of analysis, haven't included countries like Pakistan or Greece. Pakistan for simple reason that stock market performance is linked with terrorist activity in the country. Higher the terrorism, better the performance. while countries like Greece have been omitted because Index which is down 95% from peak can be up 100% from low but it will still be down 90% from peak.
2) Out of top 5 performers, 3 are directly linked with their currency movement - Japan, UK and Switzerland. Japan is very well known story and has had more than enough share in media discussion of weak yen policy, inflation targeting blah blah. UK pound has been pounded in 2013 against USD. It is down 4.6% in 2013.
3) Swiss franc is interesting because swiss franc has been fixed vs Euro at 1.20 (in terms of floor price). Swiss Index was clobbered from 6500 to 5000 (between June 2011-Aug 2011) with sharply appreciating swiss franc. Swiss Franc had been appreciating since onset of 2008 crisis vs Euro with gradual appreciation from 1.60 to 1.30 between Sep 2008-April 2011. However, the appreciation intensified with intensification of Euro crisis and swiss franc zoomed from 1.30 - almost 1.00 against euro by Aug 2011 (when famous floor was announced). Once floor was established currency was dead between 1.20-1.205 for entire 2012. However, during H1 Jan 2013, Swiss suddenly depreciated from 1.21 to 1.25 (big move given how stable it was during entire 2012). This resulted in large appreciate of Swiss Index.
4) Another interesting divergence since 2013 has been varied performance within indices. Leaders of rally from June lows to Dec 2012, have been lagging in 2013 (same thing within Indian market as well.....stocks which did well during June-Dec 2012 have been clobbered in 2013). Most emerging markets are struggling in 2013 or are under-performing US. It indicates either gradual tightening of liquidity (since there has to be explanation for everything...if someone is stupid, it has to be explained why is he stupid) or exhaustion of June 2012 rally.
5) Various extreme euphoric indicators are being discussed on various financial blogs and business papers with respect to US markets. I believe when indicators are so often discussed they lose their effectiveness as indicators. Despite all this, S&P has been in 1500-1520 range for last 18 trading session.
All of the above divergences indicates, global markets could be losing their steam pretty soon. I believe it is unlikely to be a major top because major tops are associated with higher volatility. If it turns volatile, topping process will begin.
Nifty has been quite oversold having fallen for 7 sessions out of 10 sessions in Feb 2013. Damage to Nifty has been minimal at 2.3%. Nature of fall (broader market) and global set-up indicates fall has way to go, apart from short term bounces.
ATTACHING LINKS WHICH HAVE ANALYZED INTER-MARKET DIVERGENCE IN US Markets. Guy (Michael Gayed) has been more right than wrong in past.
http://www.marketwatch.com/story/dow-13000-2013-01-30
http://www.marketwatch.com/story/stock-correction-deflation-and-two-scenarios-2013-02-08
http://www.marketwatch.com/story/wal-mart-indicator-warns-of-deflation-pulse-2013-02-11
http://www.marketwatch.com/story/vix-warns-nouveaux-bulls-2013-01-28
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