How should one read into last night’s comeback in the US market and the drop in the dollar index?
It is just normal and very temporary because the US market has just completed a cycle on the downside. All along, we were working with the June lows. If you look at the S&P 500, 3,600-3,650 was a very obvious support level which I am sure every market participant in the world might have been watching and that has really triggered the bounce.
Excuses come out of nowhere. It was just a support and therefore a bounce had to happen and the markets were very oversold on the short-term timeframe. But the problem is this looks temporary and the equity markets in general continue to look quite fragile.
In fact, what is discouraging and even scary is that 80% of the world equity markets are still in the bear market that started in October 21 and now we are near October 22 and so it has been one full year and the markets have been making a series of lower tops and lower bottoms but in that context, in India we are clearly better off and we have not done so badly. We have been in large ranges – 15,500 on the downside and 18,500 on the upside. This is just quality consolidation and outperformance.
So the world and the US continue to be in a difficult space. I see this rebound getting sold into and eventually we will go on and make new lows. If that were to happen, India will see further pain in the near term.
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Are you making a case that we should not get excited about the decline in the dollar index? The trend is still strong. What we have seen is more like a blip in the long-term trend?
Yes I think so. What I am actually looking at is the USD-INR because in the last six months, there has been a near perfect correlation and whenever the rupee has appreciated, Indian markets have done well and whenever the rupee has started to depreciate, we have just fallen off the cliff and this has happened multiple times.
Even in the last seven to ten days, the manner in which USD-INR got past 80, that pretty much triggered the 1,000 point correction. It is just a correlation that has worked. It is not something that is going to work forever but in the last three-six months, given the dynamics around the world, currently it is working quite well.
Even looking at the currency space, the dollar index, the US 10-year, the Indian 10-year, all the factors suggest that we are not out of the woods yet.
In the morning and last evening, we were debating whether we have a temporary bottom in place for US markets and if we have a top in place for the dollar index. Your view is that in the medium term barring one-two days, the trend for the dollar index is higher and that for the US market is lower.
Yes that is exactly the view. India VIX is still at 21-22 level. In the past, have you seen markets bottom out with such low levels of VIX? I think the activity has just started off in the last one week and even if you look at the US market, VIX has not really gone off the roof. So there are signals that we will see lows once 3,600 breaks on a closing basis on the S&P 500.
In fact, if you ask me what my worst case is, it is quite scary because that is at 3,250 on the S&P and significantly lower for the Dow as well, maybe about 7% to 8%. In that kind of environment, bounces will not sustain and it will get sold into.
We breached the 200 DMA today as well. It is a bit of a struggle. It is expiry day today. What levels are you monitoring for the index? Where do you see the supports and the resistances?
Since the time we started to correct from 18,000, we were very clear that somewhere around 16,800, the market should find quality support. Why? Because that is where the 200-day exponential moving average was and it was also an important retracement number. If you look at the last three months, there were important pivot points around this 16,800 area and therefore the bulls are trying to put up a fight.
But the problem is the market is fragile and the sentiment is weak and the studies do not have indications of bottoming out. I think rallies will get sold into. Once we break 16,800, there is a fair chance that we move towards 16,300 to 16,500 where another attempt to bottom out would be seen but in the bigger context, in the context of the ratio charts which is Nifty divided by S&P or Nifty divided by the world. We are still way better because while most global markets have broken June lows, we are still a good 10-12% away. There will be outperformance along with pain.
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