We’ve been advocating for a more defensive approach towards Equities for most of the last month as the Large-Cap Indices failed to hold onto their new highs and have since reiterated that sentiment throughout February. (Feb. 3rd and Feb 18th)
The strongest Equity market in the world has been the US, however, last week prices started to confirm the weakness we were seeing under the surface since January. Today we wrote a brief piece on US market breadth which reinforces our view that defense remains the name of the game.
This follow-up is to make the point that if the strongest market in the world is catching down to weakness in the rest of the world, then India and other countries that have underperformed are likely to continue struggling in the near-term.
In fact, the breadth divergences we highlighted in the US are also playing out in India.
Let’s take a look.
Here’s the Nifty 500 Index which made a new marginal high in January, but only 3% of its components made a new 52-week high. That’s roughly half of the 6% we saw when stocks were rallying in September of 2019.
Click on chart to enlarge view.
Here’s the same view except with the number of components hitting overbought conditions (Daily RSI-14 above 70). This indicator came in marginally well below both its 2018 and 2019 highs. Fewer stocks getting overbought showing buyers being less aggressive and potentially losing control of this uptrend.
Global breadth continues to deteriorate in the near-term, suggesting a continued defensive approach towards Equities remains best. In the meantime, there continues to be opportunities on both the long and short sides of the tape if you need to be active in the Equity market and are diligent about picking your spots.
Members can check out the Trade Ideas page for all of our recent ideas.
For the rest of us, patience, heavy cash positions, Bonds, and Gold continue to work just fine.
Thanks for reading and let us know if you have any questions!