New Cycle of Large Swings
| Fortnightly Close | Dow Jones | Nasdaq | Nifty | Gold | Crude Oil (WTI) |
US Dollar Index (DXY) |
|---|---|---|---|---|---|---|
| Previous | 27657 | 10793 | 11504 | 1957 | 40.97 | 93.01 |
| Current | 27682 | 11075 | 11416 | 1904 | 37 | 93.81 |
| Change (%) | 0.09 | 2.61 | -0.76 | -2.71 | -9.69 | 0.86 |
Last fortnightly’s note – Apaarr Notes 8 highlighted the signs of exhaustion in the bull market and we experienced a sea of red in a span of 4 days. Though we mentioned that we may head sub 11000 on Nifty and Nasdaq was weakening. The speed of this move down to 10800 from 11500 was really astonishing to us too. The upsurge back to 11400 is not sustainable and it will move down most probably.
The last fortnight was unique in the sense many bulls were tamed in short span:
- Gold fell all the way to $1860, our long due levels to start buying again
- Nasdaq and Nifty scared the bulls with 8% decline and got moderated
- Copper which had a unidirectional rally from $2.50 to $3.15 fizzed off to $2.90
- Agro commodities took a hit
- Crude oil touched $36 with a massive decline of more than 10%
Such things happening in a synchronized manner is a sign of macro-level capital readjustment across the asset classes. Thus we anticipate that a new cycle of large swings will get funded in the coming weeks. In this process, funds move into new asset classes and move out of some other asset class, and then we have a fresh trend.
When 90% of the market volume is from the derivative segment then, at times, the derivative segment becomes powerful to drive the market when the size of open interest builds substantially large. Those are the times when fundamentals and technicals have to take a back seat and wait for these loaded contracts to close. That’s precisely what we highlighted - “loaded derivatives” as a possible reason in our last note.
We still have many challenges brewing constantly and can’t say when they reach a boiling point or get settled.
- No clarity on pick up in the economy and level of the impact of corona post normalcy
- Looming threats at the borders and colder months are strategically used by China in war. Remember it was 20th Oct in 1962 Indo China war.
- Weakness in global financial markets.
With all these in place, we believe the rallies in the equity will be short-lived due to thin volume and negative news flows. Precious metals will be a better place to look at deploying cash, though a surge in the dollar index can spoil the party.
Market Commentary
Equities:
We may see more selling in the coming weeks and gradually Nasdaq and Nifty both will visit sub 11000 again.
Currencies:
Though we expect the dollar index (DXY) to gradually go to lower levels of 88 but the current strength can take it to 96 for the short term. Traders and exporters should use these surges wisely to cover their exposures for at least 5 -6 months.
We believe EURO is the weakest of all the lot and the UK Pound to strengthen in the months to come. USDINR range has shifted down as RBI stopped absorbing USD, big indications for exporters to get ready for eventual 68 on USDINR. Use upsurge too short and wait with patience to see lower levels.
Crude Oil
This commodity is testing lower levels and patience of long term investors. At these prices, no oil company will be comfortable on their margins so we believe there is a macro-level shake-up that is coming. Let’s keep fingers crossed and stay long with low leverage as this is a long term trade. Leverage helps only when the trade is for the short term because the level of uncertainty increases with the duration of the trade.
Metals: Gold Silver Copper
We got our long-expected range on gold at $1860 and $24 on silver, good prices to add long positions. Though there is a possibility of the dollar index gaining strength in short term and spoil the trend in precious metals.
Buy in a staggered manner but it is time to consider allocation for sure.
We have a list of US ETF to invest and ride this rally.
Copper and other industrial metals Copper is fizzed out in a big way, so we believe industrial metals will take a back seat and it will go into hibernation for the next few weeks. Use upsurge to reduce and build short trades.
Advisory
These are information, views of best of minds, and my humble opinion, take the trade and investment decisions based on your risk profile, objectives and asset allocation. There are times we need to sit on cash and wait for the market to correct and there are times when we have to stay invested and allow the market to move up. In short, inaction in the market is the most rewarding act, once you are set on a clear plan. So fill up buying orders on asset class where there is a need to allocate funds and reduce priced up assets to keep cash for better times.
This is a complimentary note and can be circulated with friends and family members. Advisory is always one to one and this note has no relation to the advisory. We may share views but this piece is not to be considered as advisory. A note may have mention of various authors/videos/views, which are sourced from the internet and respective owners own them and have made it available free for all, it is reproduced here for awareness.
You can drop a mail to [email protected] for blocking time for your queries on taking things forward and working together on any of our core services.