Sign of end of QE and start of growth recovery:
DJIA index is bullish into higher end of set NT focus zone of 17600-18100 (on recovery from 15850) while NIFTY in struggle at higher end of set NT focus zone of 8400-8600 (losing bullish momentum on recovery from 7700-7750). The cues for this shift of bullish undertone and shift of appetite (from emerging to developed markets) are from combination of valuation, exchange rate pressure and dilution in optimism on growth pick-up in the short term; resultant wait-and-watch stance may trigger profit-booking exit from EMs for reinvestment in relatively safe exchange rate adjusted returns from DMs. If the market turns one-way on set-in of herd instinct ahead of illiquid holiday markets, then need to be prepared for one-way excessive volatility from now to end of holiday season; hence tighten the seat belts and stay prudent (and cautious) ahead of bumpy ride!
DJIA index is seen to have set up strategic base at 17600-17750 with build-up of bullish momentum over 18100 for 18275-18525. The only minor risk is from over 13% rally since mid-October low of 15855 which might pull-in profit-booking supplies. Nevertheless, in the absence of alternate investment avenues, corrective dips will be shallow to carry over the bullish rhythm into 2015. For now, let us review set focus range from 17600-18100 to 17750-18250/18500 with positive bias.
As per script, NIFTY bull-chase from 7700-7750 met set target of 8585-8635; strong momentum in the rally from mid-October low of 7723 to 8626 is pleasant surprise delivering over 11.5% re-rating in quick time. Despite significant improvement in macroeconomic fundamentals, the trigger was largely from hope, optimism and euophoria from the positive noises around with hope of translation into tangible actions sooner than later! While long term optimism is retained, concerns are from pipe-line corporate earnings meeting to elevated valuation post the 45% intra-2014 rally from 5933. There is no comfort as yet for sustainability of key macroeconomic fundamentals at feel-good levels; growth into higher end of 5.5-7.5%, headline CPI at 4-6% and twin-deficits into lower end of 2.5-4.5% when the beneficial impact is from one-off factors of sharp reversal in commodity prices and free flow of external liquidity. Having identified these risk factors in play, NIFTY will find support at 8400/8280/8175 with lift of strategic base from 7700-7750 to 8150-8200. For now, retain strategic focus at 8385/8435-8585/8635; break-out either-way not expected to sustain. However, need to stay cautious on FII herd-instinct which can trigger downside risk into 8150-8200 while upside break over 8635 may not have the desired momentum when DIIs are in the supply side. No major worries with near-term outlook of sideways consolidation awaiting more clarity from policy (and executive) actions, Budget 2015 estimations and FED monetary stance.
Moses Harding
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