Bull market? Bear market? Sideways market? That is the question on everyone’s minds.
We’ve put together the five most important charts we’re monitoring to help answer that question.
The first indicator we’re watching is the percentage of Nifty 500 stocks above their 200-day moving average. Generally, if a security is above its 200-day moving average then we can assume it’s in an uptrend. History tells us that when prices are below their 200-day moving average we tend to experience higher than average volatility and lower than average returns.
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As a result, we want to be buying stocks on the way back up…after they’ve reestablished their uptrends and are already working higher. That is currently not the case, as only 4.6% of stocks in the Nifty 500 are above their 200-day moving average. Our number is 15%. A sustained move above that level would be an indication that a new bull market may be beginning.
Next is the relative performance of Large-Cap stocks (Nifty 100) vs Small-Cap stocks (Nifty Small-Cap 100). Since most stocks in India peaked back in January 2018, this ratio has been steadily rising…showing real risk aversion among market participants, not risk appetite. Institutions that need to be long stocks are hiding out in “safer” Large-Cap stocks as opposed to dipping their toes into “riskier” Small-Cap stocks that are down, in many cases, more than 50% from their highs. If they believed a new bull market was coming, wouldn’t they be picking up these stocks at major discounts?
We need to see money flowing into Small-Cap stocks, creating a broad-based rally. Given this ratio is currently sitting at all-time highs, it continues to suggest market participants are not believing that the recent rally in stocks is anything more than a counter-trend rally within a bear market.
Next on our list is the Nifty Bank vs Nifty 100 ratio, which is making new lows after breaking its uptrend lines and 2015-2016 highs earlier this year. This sector is roughly 1/3 of the entire market’s weighting, so underperformance here is a major headwind for Equities as an asset class.
As long as this ratio is stuck below its 2015-2016 highs near 2.25, then we are likely not in a bull market.
Next up is Copper, which recently completed a multi-year top by breaking through support near 405-410. After a sharp counter-trend rally, prices are now retesting this major resistance level. Copper and Emerging Market stocks have a strong positive correlation, so if Copper is stuck below the overhead supply at 410 then we are likely not in an equity bull market.
Last, but not least, is the US Five-Year Yield. Interest Rates remain in a downtrend all over the world, meaning Bonds are in a bull market and continue to attract capital. The reason we’re looking at US Rates is that as the “safe-haven” trade, they set the tone for Rates everywhere.
The Five-Year Yield has seen downside momentum wane but remains below long-term support at 0.55. Until we see a decisive break back above that level, there’s little reason to believe that money will flow out of the Bond market and into stocks.
Zero of the five “Bull Market Barometers” we’re monitoring are currently above the key levels we outlined. Until we start to see these longer-term indicators act better then there’s little reason to believe that we are in the midst of a new bull market.
Instead, it argues that we should be prepared for continued volatility in both directions and taking trades on the long and the short side when the reward/risk is skewed enough in our favor. Otherwise, cash and uncorrelated trades like Natural Gas continue to work well.
We’ll keep you updated each week as we monitor these long-term indicators. In the meantime, let us know your thoughts.
What are the charts you’re watching?
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