Be bullish on Indian markets but keep an eye for exit signs

“No private embezzlers or bank robbers in history have ever plundered people’s savings on a scale comparable to the plunder perpetrated by the fiscal policies of statist governments,“author Ayn Rand said in The Objectivist Newsletter.

The statement was apt this week, when the equity markets cheered statements by the future chairwoman of the Federal Reserve, Janet Yellen made at her Senate hearing. Yellen is a what economists quaintly call a “dove” or someone who will favour easy money policies. It is funny that someone who takes a predatory stance of debasing the income and savings of a large portion of the public through quantitative easing being called a dove.

The beneficiaries of the monetary easing have essentially been banks and the stock market players. Trillions of freshly minted dollars later the economy still limps along. From a purely amoral and economic point of view quantitative easing is not working. The problem lies elsewhere in fiscal, tax and regulatory policy.

From a moral point of view it wrong to bleed the middle class of their savings to pad the rich. That’s what is happening now. Not to sound like a socialist, I must clarify. It is wrong to bleed anyone to pad someone else.

[caption id=“attachment_1132155” align=“alignleft” width=“380”] Representational Image. Reuters[/caption]

But the market will continue to do what it rationally does when there is lot of money sloshing around. It rallies. That is what it did and is likely to do so in the near future. Unless we have a catalyst. This can be a sudden collapse of the dollar, leading to imported inflation. Or a drop in demand for US treasuries. The coming crash then will be fast and brutal, trapping a lot of bulls who bought at a higher price.

The most scary part is that the state of the real US GDP despite massive quantitative easing. During the last economic boom real GDP of the US stood at $ 15 trillion in December 2007. As of September 2013 the figure stood at $15.79 trillion. At some point the markets will price in the failure of quantitative easing and begin to correct. An anemic real GDP growth means that not enough jobs are created to power the economy. So for now even though we are bullish on the market, we are cautious bulls. The plundering of people’s saving can power the stock market some more, but eventually we’ll hit a wall.

NIFTY

The Indian index broke a couple of support levels last week and has now bounced. The bear grip seems to have ended for now according to the charts. ( click here for the Nifty chart) . The likely hood of a bounce is due to the fact that the commodity channel index (CCI) has gone above negative 100 after falling below it. CCI is a tool that shows overbought and oversold conditions in the market. When the CCI falls below negative 100 and then rises above it, it is a signal to buy.

Also notice that there is positive divergence in the market. This happens when the price falls but the CCI rises.

When it happened in the past the markets caught a bounce. Past instances of positive divergence is shown by the green arrows on the chart. Divergences often work. Look at the red arrows on the chart that showed negative divergence - price rising, CCI falling - and the markets fell soon. So now would be a time for bears to switch to a bullish stance. In case the markets continue to fall the support areas below are marked by the blue horizontal lines.