Never Say Never: Indian Market Leadership in Global Setup

JC Parets
October 10, 2021

Presenting to you, dear readers, the Never Say Never series. Here we will discuss all those topics that a typical market participant thinks could never happen. I am a strong believer in faith and everything but I also know to never challenge the universe - in our case: the market.

I learned early on, that biases are a natural by-product of the human mind. Everyone has them, in some form or the other. But one ought to leave these biases right outside the door before entering the market. Because as soon as you believe that something could never happen, most often it does.

I had a client ask me incessantly what the next major support of a particular stock was, and after ten revisions, I said 0. "Your maximum risk is if the stock goes to 0". He stared at me, his mouth agape with incredulity.

Cut to today, where I cannot make that statement again. You see, Crude Oil traded below 0. And that changed the very idea most people believed in, me included.

So here we are today to discuss with you things in the market that may leave you astounded.

Today we are going to discuss something that most market participants would either frown upon or shrug their shoulders over in denial/disbelief.

The Indian market is acting as the leading indicator at a global level. Let's let that sink in for a while.

For far too long we've been used to following the global markets for signals with regards to the Indian market. But if there's anything that anyone knows about the market, then it is this that correlations can decouple, trends can change, and inter-market relationships can alter.

For a while now we've been talking about the strength in the Indian market and how it has been outperforming the Emerging Markets as well Global Markets.

For instance, take a look at India's performance vs the rest of the world, i.e, the All Country World Index (ACWI). You can see in the chart below the strong outperformance that is on display in the Indian market. While the breakouts were concurrent, the strength and momentum in the Indian market have been consistent.

Click on the chart to zoom in.

So this was India vs. the world. What about India vs. the Emerging markets? Isn't that a more fair comparison?

Well, the same storyline continues here too.

Nifty 50 has been outperforming its fellow developing markets as well. While the Emerging markets index has moved back below the crucial 2018 highs (when risk-on assets peaked out), Nifty has continued to power through.

Notice how this negative divergence played out in 2018 as well. But the Indian broader market continued to move higher.

If your next argument is that China is a major factor in the downturn of the Emerging markets and that the above chart doesn't tell the true story, then take a look at the next chart.

It now becomes clear that even once China is taken out of the picture (imagine that), India continues to outperform the Emerging Markets.

So this was an overview of the outperformance and leading signals that we saw coming from India. But have these signals been observed at a sectoral level as well?

Well...yes.

This is one of JC's favourite charts to track, and I get it. I get why this is important.

Indian Financials have proved in the past how they acted as the leading signals in the market, both in late 2018 and early 2020. We got the indication from Bank Nifty in 2018 that the negative trend that was in place in the US financials and the European Financials was being negated by the strength in the Indian Financials. The flipside of this happened in early 2020. The Indian Financials refused to move higher when the US and European financials were making higher highs. This cast doubt on the prevailing bullish trend. Following this, we know what happened. 2020 happened.

So going by the current scenario where Bank Nifty is hinting at higher highs, could the US and Europe follow? I know many people who would go into attack mode at this suggestion, but really, just look at the chart. Why can't they follow suit? Why is it hard to believe that India could act as a leading indicator? It has happened before, why can't it happen again?

Bias. Pure unadulterated bias.

Up next we're looking at Energy.

Nifty Energy has been displaying great strength and momentum and broke out above its 2018 highs. Again a crucial peak. US Energy stocks however have been struggling below a long-term overhead supply level. But as you read this, the index (XLE) is now trading at its pre-Covid levels. Which means...Breakout! So we have US Energy following Nifty Energy as well. I mean, did you see where Crude Oil is trading?

We checked out some more sectors and found a similar trend of following the strength!

If you've been following the Indian market and the sub-sectors then there's NO WAY you missed the Chemicals move. And if you did, well better late than never! We continue to see robustness come through this sub-sector and certainly don't intend to ignore it. It is this robustness that drew us towards the US Chemicals.

While the US Chemicals are not far behind, the price is consolidating above its early 2021 highs. Consolidating above a crucial is a good thing. Could we see an outperformance come through the US Chemicals as well? Why not!

What could be next? Well, what's the sector that's displaying strength in the Indian market? Industrial goods. So here we have the charts of the Industrial sectors of both the countries. Please note that the India Industrial sector Index is an in-house custom index created to analyse the sub sector.

The India Industrials sector has broken out, retested the level and is back to making new all-time highs. The US Equal Weighted Indutrials however, is retesting the breakout levels again at the moment. If the market strength is anything to go by, we may see the $RGI follow through soon.

We are extremely comfortable with the idea that the Indian market can be a follower but take some time to accept that the Indian market can also be the leader. Sure that may not be the case every time, but it is worth noting when it is. After all, we're all basically here to understand the trend and become its friend!

These are relationships that we're seeing in the market right now, they may or may not go on for long. But what we do know is that when the market is giving us a signal, its important to pay heed to it.

Hope you enjoyed reading this. We'd be happy to hear from you.

Allstarcharts Team

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