After a strong 2017 for equities as an asset class, 2018 has started off with a bit of a change of character. Volatility is back and frustrating stock market participants, with the median of 43 global stock market indices correcting 11% peak to trough, however, as of today 31 of 43 (72%) stock markets are in a confirmed uptrend as indicated by a rising 200-day moving average. The median equity market is off 5.77% from its 52-week high and has not hit a 52-week high in 66 days, or about 3 months/1 quarter.
I don’t know about you, but at face value these stats do not seem to support the prevailing sentiment that stocks are headed lower, and much lower at that. There are some valid concerns, yes, but after looking at charts from all over the world, the weight of the evidence continues to suggest higher stock prices globally. Still, many question what will be the driving force behind higher prices. Well, in regards to India I see several failed bearish patterns that could fuel new highs in the major indices.
First off, let’s set the stage with a nearly seven year daily chart of the equity markets in BRICK nations relative to those in developed markets. Since mid-2013 this ratio has been carving out a bottom and is now emerging from this massive base after a strong move higher in the fourth quarter of 2017. The evidence suggests that this trend is likely to continue which should bode well for equities in the BRICK nations, India included. This global tailwind is not one we can ignore when looking at equities in India.
On an absolute basis, let’s start with the Nifty 500. Prices have been in an uptrend since early 2016 and are now in the middle of the 8,500 – 10,200 range that we’re focused on. Since October the index has been forming what some might call a head and shoulders topping pattern and briefly broke below the neckline in late March, washing out buyers and bringing in sellers. Prices quickly reversed, gapped back above support and have not looked back since. This failed pattern is a powerful one and we’re seeing the behavioral effects of it in prices advancing aggressively higher. This action would suggest that we’re more likely to see our next price target near 10,200 rather than further weakness.
Midcap 50 prices experienced a similar failed pattern, however, it held support and confirmed a bullish divergence in momentum. The behavioral implications are the same as above and we’re seeing similarly strong price action since late March. As long as we’re above our previous price target at 5,125 the higher probability outcome is a retest of the old highs and an eventual move toward our next price target near 6,670.
We saw a failed head and shoulders pattern in the broader Nifty 500, we saw it in the mid caps, and we also saw it in the large cap Nifty 50. One additional positive worth pointing out here is that momentum didn’t hit oversold conditions on this correction, a sign that buyers remained in control despite the volatility. As long as prices are above 10,530 we want to be long with an intermediate-term target near 12,820.
Now that we have a view on the major indices and Indian stocks as an asset class, I want to take it one step further and look at the sectors we want to be involved in.
First up is the Nifty IT Index. Below we have a daily line chart showing prices breaking out to new highs on an absolute basis. On the pane below it we can see its performance relative to the broader market, the Nifty 500. This ratio spent all of 2017 carving out a bottom and then exploded higher, starting what appears to be a new intermediate or long-term uptrend. We want to own strength and the Nifty IT index is one place to look for it.
The next sector showing relative strength is the Fast Moving Consumer Goods Index. This chart is set up exactly the same as the one above and we can see prices breaking out to new highs on an absolute basis. On a relative basis the ratio spent the 7-8 months putting in a bottom at the lower end of its four year range and is now moving higher toward the top of the range. We want to own strong stocks and this sector is another place to find them.
The last sector that’s showing relative strength is the Nifty Energy Index. Below is a roughly six year daily line chart of the sector’s performance relative to the broader market. This ratio spent most of 2014-2017 carving out a bottom and broke out above its long-term downtrend line from the 2012 highs last August. It has consolidated since, but remains in an uptrend as indicated by its rising 200-day moving average. One thing to monitor is that the ratio is currently threatening a breakdown below the uptrend line from the 2015 lows, but if it can close back above it would confirm the bullish momentum divergence and likely send prices much higher. Energy has been a leader and is still in an uptrend, but we want to monitor it over the next few weeks to see how it deals with this potential breakdown.
The Bottom Line: The weight of the evidence from around the globe suggests we want to be buying any weakness in equities, especially in emerging markets or BRICK nations.
In India we’re seeing failed head and shoulders topping patterns across the major indices which have helped to wash out longs, frustrate shorts, and lead to higher prices by forcing buyers back into the market. Within the asset class the IT, Fast Moving Consumer Goods, and Energy sectors are showing relative strength and are the areas we want to be looking at on the long side. We have our levels for risk management in case we’re wrong, but for now the weight of the evidence suggests stock prices in India (and globally) are headed higher.