Monthly Wrap May 2019 – Book Profit, Stay in cash

 

The month of May is especially important as the NDA government will start its second term in office under the leadership of Shri Narendra Modi. The number of seats won by the BJP alone (303 vs 282 in 2014) has come as a surprise as most people were expecting a simple majority for the NDA.

On the economic front, the expectations should be muted as it is the same leadership which is restarting their work and the current market situation is worse than what it was in 2014. Secondly, the scope for a surprise is also limited because the abilities, inclinations and the mindset of the government were already experienced by the people in the last five years.

 

Let’s start our diagnosis from the valuation point of view.

 

Nifty Trailing PE Ratio (Source – https://nifty-pe-ratio.com)

 

On a “Trailing PE” basis we were NEVER so expensive in our last 20-year history. Moreover, as you can see from the graph below the Trailing PE (Blue Line) is currently 2 Standard Deviation away from the mean. Historically, the Nifty (Red line) has spent a minuscule no. of days at such high valuations. There are two ways the high valuation gets corrected, either the earnings move up (which is a highly unlikely scenario given the macroeconomic picture) OR the Nifty corrects to lower levels.

The possibility of the latter happening is substantially higher and based on historical data as given by the graph below, the quantum of correction over the next few quarters can be very high. In short … BRACE FOR IMPACT.

 

(Source – https://craytheon.com)

 

 

On the technical side also the picture is not at all rosy. Nifty is at an overbought level with long-running divergence with the oscillators on the Monthly charts. Monthly charts are normally more powerful in signaling the change in long term trends.

 

Nifty Monthly

 

  • The eight-year-old bull market is still on. The price is far away from the trendline and touching the upper end of the Bollinger band.
  • Normally RSI divergence (marked in blue) along with PPO negative crossovers (black boxes) have triggered corrections. This time the RSI divergence extends for the last one and a half years and can be potentially more dangerous. The PPO divergence is four and a half years long.
  • Such corrections are normally deep (26% in 2011 & 24% in 2015) and are arrested at the lower end of the monthly Bollinger band. Currently, it is placed at 9900 (18% lower from CMP).

 

Nifty Monthly
  • Rising Wedge is a Bearish formation and will get executed below 11000 closing in Nifty on the weekly chart.
  • A potential Double Top is also possible.
  • The May month candle is known as “Hanging Man”. This is a bearish formation at the end of a rally.

Hanging Man

Hanging Man candlesticks form when a security moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during an advance, then it is called a Hanging Man.

(Stockcharts.com)

 

The market breadth is extremely poor at the lifetime high for Nifty which is another major point of the internal weakness. The day these handfuls of stocks stop going up, the market will collapse.

 

Source – https://craytheon.com

 

 

The transformation of a Bearish scenario in an actual correction is normally preceded by some news based trigger. In the last two days, we already had enough of negative global & local news to trigger such a market correction.

  1. President Trump announced he is imposing tariffs on Mexican imports.
  2. The ongoing escalation in the US-China trade war.
  3. The appointment of Nirmala Sitaraman as the new Finance Minister is an indication that all the major/minor decisions in the ministry will be taken by PM Modi.
  4. Unemployment hits 6.1%, highest in 45 years
  5. GDP growth slips to 5.8% in Q4, stands at a 5-year low of 6.8% in full FY19

 

In view of the above, the possibility of the Nifty moving 10% higher from here is much much less compared to a 10% fall.

  • My base case scenario is a correction to 11000.
  • The bearish rising wedge will execute below 11000 which will trigger another bout of selling and take the Nifty to 10000. The 10000 zone is strong support and profit booking is advised at that level.
  • Time frame is June to August.

 

 

 

Monthly Wrap May 2019 – Book Profit, Stay in cash
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