I’ve been incredibly fortunate to travel and learn from other cultures over the years. The tools and strategies I’ve picked up during my experiences in Singapore, Hong Kong, London, Tokyo, Taipei, Dublin and many other cities around the world have really helped shape the way I approach markets.
After so many conversations with smart folks, from all kinds of different backgrounds, for so many years, it makes it almost impossible not to learn a few tricks along the way.
Today I want to share on of my favorite gauges of risk appetite:
Indian Small-caps vs Indian Large-caps.
This is the one we want to watch, more specifically the NIFTY Smallcap 100 Index relative to the NIFTY 50 index. The latter represents 50 of the largest Indian companies on the National Stock Exchange.
It’s the ratio between the two that we want to focus on:
Notice how it’s breaking out of a beautiful base, officially completing a bearish to bullish reversal.
The people who write textbooks would probably call this a “Head & Shoulders Bottom”. The homies Edwards & Magee would probably agree with that.
And I’m certainly no one to argue against it.
I encourage you to go back and analyze this ratio of Indian Small-caps to Large-caps over time. They bottomed in March of 2009. Do you remember what else happened that month?
They peaked in January of 2018, when everything else around the world peaked and started to fall apart.
This ratio, as you can see here, just bottomed out last March, along with the rest of the stock markets around the world.
For me that’s not a coincidence. There is risk appetite out there if this ratio is reversing and now trending higher.
Also, if you’re looking to replicate this ratio using ETFs, you can see that the iShares MSCI India Small-cap ETF $SMIN vs the iShares India 50 ETF $INDY is telling the same story:
If you’ve been following along, you’ve noticed that there is an extensive list of assets and intermarket relationships that we incorporate into our trend analysis.
This is a great one that I don’t think too many are following: NIFTY Smalls vs NIFTY50.
But for me, whether you ever plan on trading stocks in India or not doesn’t even matter. This is a ratio that needs to be on the watch list.
If it’s going up, we probably don’t want to be spending too much time looking for stocks to short, but actually the opposite of that.
And as it turns out, that’s exactly what we’ve been doing and we don’t see any reasons to change that.