With the United Progressive Alliance government having announced a series of reformist measures in the past six-eight weeks, the general mood in and around the Street has turned “wildly positive” from “overtly cautious” a couple of quarters before. Surprisingly though, there was hardly any significant uptick in index levels, which seem to have got stuck around 5,800 levels for Nifty. Apart from conventional technical parameters, we observe massive divergence between sentiment and price performances in the last six-eight weeks. Sentiments are extremely bullish at current levels, along with technical oscillators, and we are pretty surprised to see the bearish baritones which played aloud till the Nifty traded below 5,400, suddenly turnaround and sing soothing lullabies.
Technically speaking, the last swing from the low of 5,583 was marked by poor turnover (on a relative basis). Scaling down to smaller time intervals, we observe some meaningful signs of caution in the market. Interestingly, negative divergences have started to develop between price and oscillators. Overall, the medium-term structure of Indian VIX is also reaffirming the same thoughts of the rally having got stretched. Hence, in spite the Nifty index hitting marginal new highs, that doesn’t automatically get translated into good health.
Won’t it be prudent to book profits in automobile, banking and cement stocks, alongside fast-moving consumer goods majors which have given excellent returns in the last two quarters or so? In Edwin Lefebvre’s 1923 classic trading book, ‘Reminiscences of a Stock Operator’, Jesse Livermore explained the common thought of the day is, “you never grow poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market.” Positions should be built gradually and liquidated gradually, if one wants to be in place to catch the meat of the trend. If one has built his/her positions gradually in and around the lows of the Nifty 4,800 during May-June 2012, then he/she won’t grow poor taking profits.
Moving on to cues from other markets, the US market’ sell-off is increasingly gaining momentum and the same with European markets. An interesting observation is that, charts of US 10-year bond yields are showing signs of a breakdown, which implies another fresh move on US bonds. On the other hand, following the inter-market theory, the dollar index should strengthen, resulting in a decline in the euro and other majors. Such an inter-market set-up doesn’t give encouragement for emerging markets. Although some may argue equities in India have shown resilience, the question is how long will the resilience last? India, being an emerging market, would witness some correction (five-eight per cent) if US 10-year treasuries rally. Lest we forget that equities in India rallied when bond yields rallied in the last three-four months so by rule of thumb, equities in India should correct when bond yields soften.
To conclude, though the overall trend (starting May-June) remains positive, a minor correction after an upmove of 20 per cent would have positive influence for the rally to sustain another three months.
The author is chief technical strategist – institutional equities, Karvy Stock Broking