Indian Market Outlook - Global Technical Perspective.

Discussion on market recovery post 2008 mayhem is settled: It is V shape in China and W shape in India.

Many analysts globally are struggling with the issue as to what will be the shape of market recovery post global meltdown of 2008. But as far as China and Indian market is concerned the issue is well settled that now, with these two markets have already made recovery and have established the recovery structure. China has witnessed ‘V’ shaped recovery with the popular Shanghai Composite index making low of 1664 on 28th October and then staging a sharp recovery to levels of 3478 on 4th August 2009.

Shape of recovery in India had been ‘W’ with the two bottoms around 8000 in Oct 2008 and early March 2009 and intermediate high of 10469 in early Jan 2009.

Prognosis:

1) Economic context may not provide appropriate framework to understand the market now, as it is an established empirical fact that stock market usually recovers before economy does. Many of the global markets during current (August 2009) month have traded at new yearly high suggesting markets structural strength.

2) Also had this rally been a mere correction of last year fall then we would not have witnessed mid cap out- performance that has characterized the current rally. Bear market rally usually lacks the depth with only few selective stocks advancing. But currently rally since end of February has seen High Cap advancing by 75%, Mid Cap by 92.2% and small cap by whopping 104%. Below table shows years in which mid cap index has outperformed hi cap index and such out performance has always been followed by sustained up move in the market

History suggest, Mid Caps Outperformance confirms Up- Move in Markets henceforth

In year 2007 Mid Cap had under performed with respect to Hi Cap resulting in bad 2008. But now mid caps are outperforming.

3) In last ten years Sensex has produced negative returns only if it is preceded by negative return in the first half of the year. In fact one interesting observation is that H1 on an average has produced only 1.03% return whereas H2 has produced 14.11% average return.

Sensex: H2 returns are negative only when H1 is negative

4) Sensex had also shown higher alpha (visa a visa Dow Jones Industrial Index) this year. Presently for the year alpha of Sensex is about 2.16 which is higher than any of the last six years value of Sensex alpha. And this further suggests strength of Indian market.

Table of Alpha

Consistent Rally with Intermittent Sideways Correction is high probability scenario for Indian market

Prognosis:

The rally in the Indian market that started in year 2003 is similar in structure to the bull run of US that was there during 1982-2000. Under this broad comparative, decline of 2008 is a correction within over bull market similar to 1987 correction of US bull market.

Rally of 2009 in Indian market also will have a structure similar to rally of 1989-89 of US, implying that, it will keep advancing up with sideways corrections in between till it reaches the previous high of 21000. So, deeper correction in Indian market is very low probability scenario. Rather Indian market will keep stretching upward with sideways consolidation at times. One such sideways correction is happening right now with market trading in the range of 13000-16000. 

In the near term China is bit of overhang for the market. Beijing is selectively tightening lending, with new Yuan loans falling to near Chinese Yuan 300 billion for August, from levels well over yuan1 trillion per month earlier in the year. And similar impact has been seen in Chinese stock market. Shanghai Composite Index has fallen by over 20% in the month of August but it has yet not dampened the sprit in stock market globally. Further fall in Chinese stock market may put obstacle to this global stock market party.(of particular interest to watch is Shanghai Composite Index important technical support level of 2402) And only in that scenario Sensex may go and touch its lower level of the current sideways consolidation zone of 13000.

Another Important Finding:
In the past whenever Market has made a top, Advance - Decline Ratio has been less than 1. (Market top is defined as the level from where market falls by more than 30%). However, for July 09 or Aug 09, the Advance – Decline ratio has been greater than 1 signifying that there may not be a significant (fall of more than 30%) correction in the market

Market makes a top when Advance – Decline ratio is less than 1