Nifty: Between a rock and a hard place

Do you know what the Defty is? Heck, they don’t even call it that any more. Possibly because it doesn’t show us in a very good light. Irrespective of what it’s called – the National Stock Exchange (NSE) now calls it the Nifty50 USD – the Nifty denominated in the US dollar. This Nifty50 USD was once the Defty. When the Nifty had closed at a then record high of 6287 on January 8, 2008, the Defty had ended the day at its own record closing high of 5548!

That’s right. An average foreign investor has actually lost a quarter of his investments in India even after keeping the faith in the country's growth story for 12 years! The reason this small piece of statistics should be kept in mind, particularly by domestic investors who believe that equities are the only game in town and India is a mascot of global economic growth, is because the out-performance of US stocks vis-à-vis their Indian counterparts is just getting more glaring.

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There’s no doubt that the pullback in US stocks from the March lows has been largely due to the biggest monetary expansion in modern times by the US Federal Reserve and it could have long-term ramifications. But then what’s stopping us from doing the same?

Froth Story

“The government has to do the heavy lifting” is the new favourite line on Dalal Street.

Corporate earnings haven’t budged for over five years now. Companies are not undertaking new capital expenditure given the low utilisation of their existing capacity; the banking system has been crippled by rising bad loans and small scale and unorganised sectors never regained their mojo post-demonetisation. The SIP investors have so far kept their faith in the India growth story and inflows in equity mutual funds keeps rising. The fund managers invested this money in retail lenders that dominated the benchmark index completing a circle of money flow.

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Going by the evidence so far it seems, the government firepower falls short of most expectations. There’s almost a consensus that the real size of the stimulus package announced by the Finance Minister was a fraction of the Rs 20 lakh crore package that the Prime Minister had promised. Add to it just Rs 4.2 lakh of additional borrowing and massive increases in excise duty on petrol and diesel and it becomes clear that forget providing a large stimulus, the government will most likely struggle to just maintain status quo even without it. For, if we indeed are looking at around 40 per cent contraction in India’s quarterly GDP as some brokerages suggest, one shudders to think how much the government’s tax revenue will drop in the next two quarters.

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Bank Run

Last week, this column suggested that the Nifty is likely to grind lower if the S&P 500 holds strong, but is likely to collapse if the latter starts a serious leg down. That worked out pretty well as the Nifty ended the week a percent lower while the S&P 500 jumped over three percent. The 2760-2960 range on the S&P 500 mentioned last week also held out pretty well. While there was one close above the upper range, that was corrected almost immediately with the index ending the week at 2955.

The week also saw the Bank Nifty’s under-performance continue. With the Reserve Bank of India (RBI) seemingly out of bullets – the repo rate is now at four percent as compared to food inflation at 8.6 percent in April and the moratorium on term loans extended by another three months – one continues to struggle to believe that banks and non-bank lenders can get any buy call from bulls.

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VIX in a fix

While the Nifty has been grinding lower, oddly India volatility index (India VIX) is also doing the same. In the normal course, the two should move in opposite directions. A measure of the market’s volatility expectations and calculated using option prices, the India VIX is generally inversely related to the Nifty. But having reached an extreme of over 80 percent in March, the fear gauge has been correcting for the last two months. On Friday, however, although still ending the day lower, it tested its last year’s highs, the break out level of March and its 200 Day Exponential Moving Average (EMA).

If the multiple supports tested on Friday are respected and the India VIX starts another leg up – confirmed with a daily close above 41.25 percent – then expect the 8800-9000 short term floor on the Nifty to get breached and another round of chaos to unfold. If the India VIX closes below 30 percent and the Nifty still fails to take out its resistances in the 9300-9500 range, then we are most likely entering a protracted bear market. Unfortunately for investors, one doesn’t know what’s worse.

(Lead Illustration by Shefali Saxena)

(The writer, T-Rex, is not a dinosaur. He is a technical analyst from the previous century.)

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of 30 Stades.

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