Charts and Thoughts on the Current Market Scenario

It’s been more than a year and Coronavirus is still impacting our lives everyday. Mumbai where the maximum number of cases have been seen is implementing a Night Lockdown. Madhya Pradesh is implementing lockdown on Sunday’s. Punjab and Rajasthan are the other states implementing night lockdown  (though I do wonder if there is any scientific evidence to back this strategy as being better than doing nothing).  

This along with the volatility we have seen in the markets over the last few days has meant that there is a perceptible fear of a repeat of March 2020. I still sense that we will not see lightning strike twice at the same place though I have been wrong earlier and could very well be wrong now too. 

So, rather than just speculating on what could happen, I felt a better way would be to look at some charts and compare and contrast the same to February end to see if we are in similar territory.

First is Nifty 50. Here is a chart that compares how it was at the beginning of March 2020 vs today

The black line represents the 200 day moving average. While it broke at the end of February 2020, today we are way above it. While this doesn’t mean that the markets cannot fall, the probability of markets becoming bearish big time from here is rare. Bad things generally happen below the 200 day EMA though as usual, there are exceptions to the rule. In January 2008, Nifty 50 was trading 31% above its 200 day EMA when the fall started and within a couple of weeks we had a drawdown of 30% from the peak’s. Today, Nifty is 15% above its 200 day EMA (it was 30% in January of this year)

This bull market has been such that for months now, Nifty had not broken the previous month’s low (even intra-day) since October 2020. This was broken last week when February’s low was finally taken out. Not much of a negative signal though it does show that the trend is not as strong as it was in the last few months.

Volatility

India VIX refuses to rise for now and thus signalling that traders aren’t expecting a big move on the negative side (it’s implication is always the negative side). A cause for concern would be if India Vix crosses the 30 mark. 

Volume Demand vs Supply 

In line with market weakness, we have seen that aggressive buying has dropped off. We saw a similar trend back in September as the market seemed to weaken off before it resumed its journey. 

Safe Assets performance (vs Risky Assets)

When there is an overall fear scenario, money tends to move towards safety – be it Gold or Bonds and hence they tend to perform relatively better vs the markets. 

Ratio Plot of Gold Bees vs Nifty Bees seems to suggest no such move for now. I have marked a vertical line to show where this ratio was at the end of February 2020

India 10 Year Bond Yields aren’t trending down as it was for a long time now but is not trending higher either. Hopefully this means that the markets aren’t expecting a big rise in Inflation (which could be negative for the markets)

Breadth Indicators

The strongest feeling that not everything is bad is being given out by a few breadth indicators I follow.

The percentage of stocks above their 200 day average has slightly tapered off from the highs we saw earlier this year but still going pretty strong even though Indices like Nifty Smallcap 100 are yet to reach the highs they reached in January 2018

In a kind of a conundrum, the percentage of stocks that have positive momentum is still pretty much close to its peaks. I say conundrum since the above chart seems to showcase a bit of weakness. This could be explained by the fact that many a time, the 200 day is not broken because the stock has fallen substantially but because the average is lagging, it has caught up with the price and even a small fall can mean a break below it

Another indicator I have started tracking recently is the percentage of stocks whose 1 year trailing returns are higher than Nifty 50. The reason to follow this is to gauge whether the market is bullish owing to a few heavy weights moving it around or there is general bullishness around. While we aren’t close to where we were when the 2014 bull market started, the trend seems to be bullish for now.

Maybe due to new margin rules kicking in or maybe due to other exogenous factors, Nifty has opened this month with one of the lowest open interest since September of last year. While I wish to draw no conclusions, this seems to be generally not a great sign for bears.

Based on my understanding of the data and the overall scenario I am painting as to how the markets may behave in the forthcoming months and years, I continue to remain bullish and hence these charts and the analysis may be tainted to that extent. 

Finally, Since 2012, Nifty has been trending in the same manner as S&P 500 even though we have had divergences along the way. As long as S&P 500 is trending higher, we should hence be safe from seeing a large fall which has been historically rare (I will need to go back to 2004 and the fall of the NDA government to find such an instance).

Portfolio Yoga is a SEBI registered research advisory and nothing in this post or elsewhere on the site should be constructed as Buy or Sell recommendations.