Weak rupee may challenge Nifty complacency

It’s all about timing. The last few years should have cleared this idea well for many of us. This is what we said in our January 4 outlook: “The time indicator is an oscillator. A rising oscillator indicates a trend and a falling oscillator indicates a counter trend. At this stage, the intermediate time indicator is still rising, which suggests there may be a further upside. Any rally in Indian markets should not last beyond the first quarter of fiscal 2010 (high of 2010).”

We are near there, but markets have not come down yet. Markets have a tendency to overextend, both on positive and negative side. Behaviourologists call it over-reaction and under-reaction. The interesting question is to understand how long can this over-reaction last? Before anything, let’s try to understand the market structure.

First, the markets are flat now for more than 12 months with a net 10 per cent sideways action, which suggests more indecision than a trend. Agreed, shorts did not make money. What about longs? Secondly, the NIFTY VIX is at an all-time low for more than a few months now. Market Complacency is at an extreme. The conventional way to look at this is that market participants as a group feel that “Nifty can’t fall”.

Third, negative candle formations like evening star and true resistance lines are standing firm just a few percentage points away. Fourth, the Indian rupee (INR) is stagnating at near-46.6 levels and performance cycles benchmarked against dollar index suggest the INR is still weak. We continue to look at 47 and 47.7 for the rupee against the dollar. So, if the INR is weakening against the dollar, then not only the complacency in Nifty can be challenged but any negativity on Indian equity could exacerbate. August top remains a high probability for us, after which markets could witness heavy selling pressure.

One can filter some signal noise with extreme sentiment (Nifty VIX low), some with lack of price confirmation (5,500 still unbroken), some with time (August top). But then, if patience runs out, all the hard work comes to a naught. The running pairs, short Nifty-long Sterlite and short Nifty-long Hindalco delivered six per cent and are still running.

Benchmarking Indian stocks to the rupee and global assets to the dollar was one idea to take timing to absolute signals, integrating three degrees of Rieki (minor, intermediate, primary) should give us more clarity on “when?”. Higher accuracy on time is also achievable. It is patience that is the harder virtue.

The top potential under-performers remain ONGC, L&T and M&M. On the sector side, Consumer Durables and Capital Goods remain at the top of the list as potential under-performers.

Meanwhile, metal stocks should continue to outperform the broad market. This means even if metals reverse the absolute trend, they should still fall less than the broad market or not fall at all. We would like to reiterate that the 54 assets Alpha India are benchmarked against the INR. This means assuming INR remains range-bound, or with limited price action, the relative ranking performance against INR would give an absolute indication of price direction.

Markets can surprise and does surprise, but this does not mean that weak market structure and weight of evidence should be ignored. Till market breaks 5,500 clearly, stay alert. And even if it does, look at buying the worst rather than the best.

The author is CMT and CEO, Orpheus CAPITALS, a global alternative research firm