A TIME TO BEGIN PORTFOLIO BUILDING AT CURRENT LEVELS? A CRITICAL INTER-MARKET TECHNICAL VIEW.

Indian Equities formed a low of 6985 immediate in February end and since then it began a upward move. It went on to rally for nearly 2000-odd points while it formed an intermediate peak on Daily Chart, a Double Top on Weekly Chart simultaneously around 8968 levels. It halted the up move and entered into intermediate downtrend in form of a falling channel, subsequently breaching that channel to form the lows of 7916, retracing nearly 50% of the referred up move. During this time, we digested Brexit, Donald Trump victory, Demonetization and its feared impact on slowdown in coming quarters.

Let us now examine the Fixed Income Asset and its correlation with Equities.  The above is a 10-YR US TREASURY NOTES CONTINOUS (CBT) Chart. If one sees, during the same time in July, along with Equities, the Bond price too made its top around USD133-USD134 range and transformed into a falling Channel.

A Fixed Income Analyst would have foreseen the sharp decline in Equities that we witnessed, especially over last fortnight.  The ferocity of the fall in Equities to do with the above Chart as well.  If we examine the above Chart, The US 10-YR Bond prices reported a “Death Cross” wherein its 50-DMA reported a negative crossover over 200-DMA. This was sometime beginning of November. This is a technically bearish sign indicating that an issue will have bearish implication going ahead. We saw the Bond prices, which were comfortably in a falling channel at that point of time, came to a sharp decline,  gave a downward breakout from the falling channel, went beyond its measuring implications and touched a low of USD 126.06.

We know that Bond Prices and Equities have direct correlation. Similarly, Yields and Equities have a negative correlation. The fall in Bond prices caused the Yields to move up sharply as indicated in the below Chart.

 CURRENT VIEW

We believe, at present levels, the Equities may be well within its range of finding a bottom for itself in the near term. Let us examine few points that support this view, though potentially.

The Bond Prices, which trade “oversold” on both Daily and Weekly Charts, also trade near its multiyear support levels of 125 and 122. If we examine yields, it does have some room left on upside. This may be filled up by the Bonds which may still see minor pressure in the range of 122-125 which are its multiyear supports. However, they are expected to stabilize in the referred zone.

By the time this happen, we are likely to see some volatile ranged movements in the Equities. It is most  likely scenario, the Equities may continue to witness volatile sell-offs from higher levels, but it is likely to remain in a broad range and current lows are less likely to be broken and is likely to have very limited downsides beyond that. During these broad movements, we are likely to witness some potential signs of Accumulation as well.

Keeping all this in collective view, we believe it is time to start staggering purchases in key large caps and very select MidCap stocks. The current sharp decline has presented an excellent  opportunity to start building long term portfolios  and one can easily begin with exposing around    20-30% of the amount available for Investment.

Even if we apprehend a actual slowdown in consumption in the coming 2-3 Quarters following Demonetization, exposing 20-30% will not a bad idea as it keeps sufficient liquidity for a long term investor to Capitalize on some more downsides while investing over the long term as the downsides, if viewed in a long-term horizon seem and remain limited even in the view of the pending US Interest Rate hike.

 Another important factor that we need to take into account is the strength of USD. This otherwise act against the Equities and US Dollar is likely to enter into a long term up move over coming months as indicated by US Dollar Index 15-Year Monthly Chart on the left.

However, this should not be viewed singularly. This is a global phenomenon and US Dollar will strengthen across world currencies and currencies of Emerging Markets and again, within Emerging Markets, Indian Rupee (INR) continue to remain resilient and a relative out-performer.

Based on Study of Long Term Charts, we have short listed few stocks, both Large and MidCap which Investors should start “Accumulating” at current and each lower levels with a long term investment

Disclosure pursuant to Clause 19 of SEBI (Research Analysts) Regulations 2014: Analyst, Family Members or his Associates holds no financial interest below 1% or higher 1% and has not received any compensation from the Companies discussed.

Milan Vaishnav, CMT
Technical Analyst

(Research Analyst, SEBI Reg. No. INH000003341)
Member: Market Technicians Association, (MTA), USA
Member: Association of Technical Market Analysts, (ATMA), INDIA
www.EquityResearch.asia
http://milan-vaishnav.blogspot.com

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