[Premium] Q1 2019 Playbook

2018 was not a great year for equities as an asset class, with the median stock market down 10.96% in local currency terms and many of those losses coming in the fourth quarter. With that said, there were 6 markets up year-to-date through 12/28 and one of them is India.

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When looking at an equally-weighted Chart of the BRICKS (Brazil, Russia, India, China, South Korea, South Africa) we see prices pulling back to their '15 highs as momentum diverges positively. An upside breakout from this wedge would confirm that this was a corrective move within a long-term uptrend and signal further upside in 2019.

Click on chart to enlarge view.

When looking at equally-weighted chart of the BRICKS versus the BRICKS Ex-India, we see a beautiful upside breakout, retest, and continuation higher. This chart tells us that India is likely to out-perform the group as long as prices are above the initial breakout area.

To simplify Developed Markets, I've equally-weighted the S&P 500, Nikkei 225, and Stoxx Europe 600, and plotted it vs. the BRICKS. Until this range resolves itself, BRICKS will continue to gyrate relative to Developed Markets over the intermediate-term.

When looking at it through the lens of US Listed ETFs, we see India attempting to break out from a 3.5-year base relative to Emerging Markets, suggesting that even in Dollar Terms India is likely to out-perform its peer group.

Now that we have some perspective on India's relative strength versus the rest of the globe, let's take a look at the major indexes on an absolute basis.

First is the Nifty 50, which from a structural perspective is consolidating within a secular uptrend. Momentum is in a bullish range, but until prices break the January highs or year-to-date lows, there's little directional edge.

When looking at Midcaps the picture is similarly messy, with prices toward the middle of their year-to-date range and below a downward sloping 200-day moving average. Momentum is also in a bearish range, suggesting a neutral/bearish approach is best. With that said, from current levels the reward/risk is nearly identical on the upside and downside over the intermediate-term.

The same can be said for the Smallcap 100, which continues to consolidate near our downside price target as prices try to regain their footing. The index is currently consolidating at multi-week highs, however, momentum remains in a bearish range and a downward sloping 200-day moving average is just overhead. So again, the reward/risk over the intermediate-term is about equal.

When you combine all the market-cap segments to create the Nifty 500, we see a similar, messy picture. Momentum is in a bearish range and prices are right near a flat 200-day moving average, signaling a lack of trend.

The out-performance from large-caps relative to small-caps doesn't seem to be going away any time soon, as the Nifty 50 vs Smallcap 100 ratio continues to consolidate its strong gains in textbook fashion.

Given these are cap-weighted indexes, it's important to know what the largest components are doing. Below is an equally-weighted chart of the Nifty 500's top 10 components, which account for roughly 40% of the index. While prices are above a rising 200-day moving average, they're below the trendline from their 2017 lows and momentum is in a bearish range, giving us mixed signals. With that said, it's clearly not in a downtrend, so it's difficult to get too bearish on the Nifty 500 given 40% of its weighting is in an uptrend.

We've been watching the relative strength in the largest sector of the market, Financial Services, since November as a possible clue into the next major trend. The relative strength we identified early has continued, which is a big positive for the bulls given this sector accounts for a third of the market's weighting.

On an absolute basis we can see prices breaking back above their January highs, but momentum hasn't gotten into overbought territory just yet. Further consolidation above the January highs and RSI getting above 70 would be a huge positive.

Here's a chart showing the Nifty Financial Services Index hitting new highs relative to the Nifty 500. This is a strong trend that doesn't appear to be changing anytime soon.

A breakout in the sector's largest component, HDFC Bank, would be another positive for the market that we've been waiting for.

Meanwhile weaker components like Bajaj Financial Services have found their footing and are beginning to trend higher once again. Bulls want to see momentum confirm these price improvements by getting into overbought territory.

The second area of strength is the Nifty Fast Moving Consumer Goods Index, which has held support and is attempting to break out once again.

Stocks like Hindustan Unilever continue to lead, not getting oversold during corrections and getting overbought as prices make new highs. This is the type of stock we want to be buying weakness in.

Titan Company Ltd. is another large component that has been consolidating for over a year and looks ready to break out once again. This would be further fuel for this sector and the overall market to head higher.

The Nifty IT Index had led the market higher early in the year, but is struggling to reclaim broken support near 15,150 and momentum remains in a bearish range. If the broader market is going to have legs, IT needs to be participating to the upside.

This hesitation in the index can be seen in individual names like Wipro, which has been attempting a breakout for months and can't hold onto its new highs. We think it ultimately gets there, but will need the other components to catch a bid first.

The Nifty Energy Index is another significant portion of the market that's been unable to resolve its 1.5-year range. Reliance Industries is the largest component of this index, so it looks very similar to this chart. If this sector and the broader market is gonna break out, Reliance Industries needs to be trending higher. We haven't gotten that breakout yet.

With that said, under the surface there has been some stabilization among the other Energy names. PTC India is in the process of transitioning from a downtrend to an uptrend, with momentum now getting overbought as prices clear resistance and the 200-day begins to flatten. Although their weighting may not be as significant as Reliance's, its certainly a tailwind for the broader market to have fewer of its components in downtrends.

The same can be said for the Nifty Infrastructure Index, which is attempting to transition from a downtrend to a sideways trend. Fewer components are seeing downside continuation and its leaders are attempting new highs.

Its largest component, Larsen & Toubro, continues to show relative strength and consolidate at all-time highs. It's hard to be too bearish this index if its largest component is attempting to break out.

An example of a component that's attempting to base is Bharti Infratel. The slow grind lower after breaking support as momentum diverges is not an ideal short setup, as it signals a correction through time rather than price.

Again, the same can be said for the Commodities Index. A lot of our short ideas from this area have worked, but there are fewer opportunities emerging and we're just not seeing much downside acceleration at the index level. Until prices make new lows, a neutral approach is best.

Another area of improving price action is the Nifty PSU Bank Index. Many of the smaller components of this index were crushed through the first 3/4 of 2018, but many have stabilized and that's clear from the failed breakdown in the Equally-Weighted version of the index. While there's still a lot of work to do structurally before we get an "all clear" in these stocks, the recent improvements in price and momentum continue to suggest many of these names are forming significant long-term bottoms.

Relative performance has also stabilized, which is another sign that this area may present several opportunities on the long side in early 2019.

The equally-weighted and cap-weighted Nifty Media Index have also found some support, suggesting that a counter-trend rally may be setting up for the first quarter of 2019.

One area that remains weak is the Nifty Metals Index, which continues to offer opportunities on the short side. Unlike the Commodities and Infrastructure Indexes, its components are not showing the same level of price or momentum stabilization. For now, we'll continue to err on the short side of this sector.

The last sector is another weak one, the Nifty Realty Index, which has rallied back into former support. With the downward sloping 200-day moving average just overhead and momentum in a bearish range, the expectation is for this index to resume lower and retest its year-to-date lows.

On the Interest Rate front, there continues to be little evidence of an intermediate or long-term bottom in rates. We're about halfway between the top and bottom of the year-to-date range, but it looks like we'll revisit the bottom of that range over the intermediate-term.The big question in the Commodities and Currencies space is whether this structural breakout in USD/INR will hold or if it will fail. We should know very early in the year whether or not it holds, which will set the tone for the remainder of the year.

In the meantime, Base Metals remain weak. We want to be short Zinc if prices are below 190, with a downside target of 154.50.

We also want to be selling any strength in Nickel toward 810.50, with a downside target of 645.

Mentha Oil put in a failed breakout in early December, so we want to be short as long as prices are below 1,590, and covering down near 1,125.

Crude Palm Oil put in a failed breakdown a few weeks ago after falling nearly 30% since May. If prices are above 496, we can be long with a price target of 550.

The other Commodities remain in messy sideways ranges where we have little directional edge, so we'll be patient and see what trends finally emerge next year.

The Bottom Line: Equities as an asset class are still not out of the woods, however, the relative strength in India continues to suggest that it will lead once global markets regain their footing. For now, the major indexes remain range-bound at best, but there are still opportunities in individual names on both the long and short side.

The relative strength in Nifty Financial Services and Consumer Goods is extremely constructive for the bulls, however, we want to see momentum get back into overbought territory on the daily to confirm the recent price strength. Additionally, these consolidations in IT and Energy need to resolve to the upside if the bulls are going to have the strength to take this market to new highs.

The stabilization of weak sectors and shrinking number of viable short setups suggests that stocks may build on their recent progress in Q1 and ultimately head higher. With that said Cash remains a position until that trend confirms, or you can continue to play the long side of the strongest Industries like Financial Services, Consumer Goods, Chemicals, Pharma, Hotels, and Industrial Manufacturing, or the short side of the weakest areas like Metals, Autos, and Realty.

For the best reward/risk setups in individual stocks, be sure to read part 2 of our Q1 playbook.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team