AUTHOR: SS | 12th April 2021 | Read Time: 3-5 mins
Making a short term forecast– especially in these uncertain times, is extremely risky….yet I feel like taking that risk.
Going on my instincts on this one. Here goes–
For the past month, Indian equity market has been a significant laggard compared to ROW. A matured market participant (especially those who have been introduced to the niceties of Time Series forecasting at CFA Level 2 and FRM) would recognize the fact that there is lagged correlation between different equity markets…
# The initial phase of the pandemic saw how the US equity markets smartly outperformed all other markets (recall all the support extended by the Fed in the form of emergency rate cuts and various credit extension programs) and Indian equity market was laggard at the time. But later on, the Indian equity market picked momentum and outperformed the US equity market relatively. The last 1 month has again seen similar action—the US & other world markets have been performing well, while the Indian equity is somewhat laggard.
# Similarly, everyone will vividly remember how Reliance rallied in the initial lockdown days (sans the Facebook deal et all) and went on to outperform the Indian market. But then later, once Reliance touched 2000-2100 levels– Nifty (the Indian equity market basically) caught on beautifully and Reliance remained somewhat flattish.
Having said that, we must not forget the complexities of inter-market analysis— the connection between Equity, Commodities, Currency and Bond market.
Let me do a rough forecast on these for the upcoming 2 weeks…
1. I expect crude to cool off…it’s a sell on every rise.
2.I expect another 2 to 5% upside in Gold and Silver.
3.I expect the dollar index to further weaken and in turn the USD- INR pair should move lower to levels of 74 or 73.5, before springing back to say 76 or 77.
Note: You all will recall convexity in bond…jab Yield girta hai, to Bond price josh mein badhta hai…and jab Yield badhta hai, to Bond price sharma ke girta hai…
The same convexity is observed in USD-INR and Indian equity markets…
When Rupee appreciates (movement from 75 to 74), Indian equity markets josh mein badhega, but when Rupee depreciates (movement to 76), Indian equity markets sharma ke girega.
4. Bond yields in US have softened and is expected to further weaken in these 10 days.
5. US equity market as well as all other world markets are at their all-time highs…One can clearly smell reluctance to further rise except perhaps the German DAX or S&P 500 index which still have some steam left.
6. Indian equity market– characterized by Nifty, is expected to march upwards to levels of 15400 in these coming 10 days. Ofcourse, this rise will not be smooth but with gyrations all around, and a trader knows quite well how badly these gyrations result in stop-losses being hit and one losing money despite being able to forecast correctly.
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As a basis for my forecasting, I use a combination of derivative data, technical analysis and fundamental factors. A detailed exposition of these is beyond the scope of this article, but a brief hint may be added…
Derivatives Analysis–Reverse Skew levels on Nifty have come down to a lower percentile level. This, coupled with the OI structure, gives me some hint of an upward momentum in the short run.
Technical Analysis— We have had elaborate chart studies in multiple time frames using price action (the king), momentum indicators (queen) and structure of the price movement (the prince) for further confirming the view expressed above.
Fundamental Analysis—State-election results are scheduled for May beginning …mood seems to suggest positivity for the BJP led NDA…a short-term positive for the market. However, with cases of corona shooting up in India, it seems that the euphoria shall be short lived and in two week’s time markets would then crash.
So basically, an inverted U-shaped forecast is what I am making. Only time can tell what is to ensue….
As a disclaimer--we have positions in stocks, commodities and currency based on these forecasts. However, most of our positions are hedged using option strategies deliberated in the DERPO program.
All are requested to NOT use this as trading advice.
The purpose of sharing this is purely educational…to enable students in generating a passion for markets and relating the same to their studies (or rather the other way around actually!) and using tools (& models) to conduct their own research.
Happy Reading
Sanjay Sir