Rohit Srivastava, founder and market strategist at indiacharts.com, said that falling bond yields and commodity prices, against a rising dollar signal a weak economy. (Illustration: Suneesh Kalarickal)
The market has kept rallying, defying expectations and crossed 17,800, a crucial level that technical analysts were watching to see if the trend will change. It has risen beyond that. But Elliott Wave analyst and founder of Indiacharts, Rohit Srivastava still believes that this is a bear rally.
In an interview with Moneycontrol, he explains why.
Do you still see this as a pullback rally or a new bull rally?
We see a high probability that the rally is coming to an end. We will keep looking for additional confirmation for this, but as of now, our wave structure and momentum indicators indicate that something is complete at this point. Accordingly, we are significantly out of the market, with 70% cashed out. On Friday it almost touched 18,000, which is still within a bear market rally.
What is the level that you see Nifty will fall to, now that it has most likely peaked?
If I go by weekly charts, I see an upper resistance level of 18,125 and a major support at 16,600. Once we break 17,640, I would think that we are first heading to 16,600 at a weekly level and, if we break 16,600, then we will look at a monthly support at 14,500.
What are the signals you will be looking for?
From the macro context, we will watch if the dollar index and USDINR are still rising, if the bond yields are topping or bottoming out. Over the last few days, we are seeing the dollar index starting to rise again, which is signalling a risk from a disinflationary perspective and that is also then showing up in the rupee. After the RBI meeting this month, even when they raised the interest rates, the rupee did not get stronger but actually weakened from there on. So, there are signals that the rupee is not responding to rate hikes. My sense is that the rupee has now started its move to 83 to 85, and the dollar index is moving higher, and both of these are risks to the market.
Also read: High probability of our entering a new bull market: IIFL’s Sriram Velayudhan
Are there other significant cues?
There is another factor that helps us call a market top or bottom. We have seen most of the short-covering completed at 17,300 in index futures. FIIs have covered all of their shorts–they were short on the index futures in June and had cut all their short positions by end of July–and had gone long only by 15,000-20,000 contracts through August.
Also, if we look at the breadth of the market by looking at the 20-day average of the advance-decline (AD) ratio, then we can see that the AD ratio has not been making new highs as the market moves higher through August. That is a sign that fewer and fewer stocks were driving this move from 17,300 to 17,800, which signals a weakness in the underlying momentum.
While we looked at these data points, we were waiting for an actual price reversal, which happened on Friday, and the rate-of-change indicators were giving sell signals on the daily price charts.
These two to three things tell us that maybe we have got a top at 18,000 and now the next question is how much lower will it really go from here.
What about the 80 percent retracement from the October 2021 fall?
People have made counter arguments about bear-market rallies. One that this has been a significant retracement–80 percent since the fall from October 2021–and they ask if this is typical of bear markets. If I compare this to 2000 or 2008 bear markets, then yes, then the bear-market rallies did not retrace back more than 50-61 percent of any falling leg. But, markets often change the patterns.
For example, in 2018 and 2020, we were in a sort of a bear market if you look at mid-cap and small-cap indices. The two indices were not making new highs. But the Nifty kept coming back to 12,000. First time, Nifty did that because PM Narendra Modi won the election again and the market rallied back to 12,000. Then they declined. The second time was when they declared tax breaks, the markets rallied back to 12,000 in January, a month before the pandemic really hit the world. But throughout that time period, mid caps and small caps were in a bearish market making lower lows and lower highs.
If we go by that recent behaviour, then you see that the bear market rallies have retraced more than that (the earlier 50-60 percent retracement). So just because we have seen an 80 percent retracement, I will not call it the start of a runaway bull market.
We are also looking at what is happening in the global markets. For example, the US indices–both S&P and Nasdaq–have still followed the script, that is they have not seen a retracement of more than 50% of the entire fall. S&P has seen a retracement only marginally and Nasdaq none at all. These are very much in line with how they behaved in the previous bear markets.
Only in India we are seeing this big retracement which, based on 2018 and 2020, I say that it is still a bear rally. We are tracking macro factors right now and I think (movement of) the dollar is primary now.
What level does the market have to cross, for you to believe that it has entered a bull market?
Our approach to the market has changed. We don’t go only by the level, we consider macro factors as well, such as the dollar index and commodity prices. Till I see a reversal there and get an indication that something has changed (fundamentally), my outlook will remain the same.
What do you think about the FPI buying? Do you think that has caused a lot of the market sentiment to change?
Sentiment, yes. There is the general feeling that if they are buying then probably the worst is over. However, simply FPI buying or selling is not a clear signal. I can go back to 2000, even during Y2K, FIIs had actually increased their buying in the Indian market during that bearish phase quite significantly. Where they used to buy only a few hundred crores a month, they had gone to a few thousand crores a month by February and March of 2000. That was the first time they were investing significantly in India but that did not stop the bear market from continuing.
You can say that it is different now because they are buying in thousand crores a day. But, over the years, the DIIs (domestic institutional investors) have grown so big that when FIIs sell thousand crores, then DIIs buy thousand crores and when DIIs sell thousand crores, FIIs buy thousand crores. So these trades appear to be matching each other, then they cannot be used as indicators that the market will go upwards. FIIs also follow the market. Once the market starts falling, what will stop them from selling?
That takes us back to looking at other factors such as earnings growth, whether it is picking up. We have seen earnings growth has been largely flat quarter on quarter. It looked great year-on-year because of the low-base effect, but quarter-on-quarter it has been unimpressive.
Data from the US is showing that earnings will be weak for two quarters. Then we need to ask if we are going to get significant enough growth (domestically) for the market to be supported at higher levels. If we aren’t, then we will play into what is the global scenario and we look at that and see that the US earnings growth is still weak, US economic data is still weak.
Yes, US markets had rallied but, if we look at the Commodities Futures Trading Commission (CFTC) data or the futures data, you see that the reason for the strong rally despite weak economic data was that there was also short covering.
Also read: Is this a bear market rally or a new uptrend?
With the market rallying, what about the recession concerns?
We look at dollar and bond yields to understand what the market is thinking about the US recession. When bond yields are rising, we see it as signalling an inflation risk. Now we are seeing inflation data come off a bit and what I am reading tells me that inflation will come down a bit but slowly. As that happens, it is possible that bond yields go down. But falling bond yields, falling commodity prices and a rising dollar, all of the three happen only when you have a weak economy. This continues to point to recessionary conditions.
The dollar going up is a signal that we are in a disinflationary condition where commodity prices are weak. To end this disinflationary trend, you need growth to come back. We look at early signals of that… if bond yields are falling, then it is a signal that money is moving out of equities and into bonds and that isn’t a good sign initially. None of this has changed, we haven’t seen yields run away or break out. The dollar is still strong, commodity prices are still weak. All of these are signalling a weak economic environment, so we are still not out of recessionary risk.
Meanwhile, the Fed is still looking like it will unwind its balance sheet, which won’t help in stimulating demand. The only other way would be for the government to step in with a spending programme, and that looks unlikely until inflation comes under control.
