BSE Sensex at new highs: What are market internals suggesting?

Riken Mehta
moneycontrol.com

Follow me on Twitter @mehtariken

Indian stocks are trading at all-time high levels in anticipation of GDP growth picking up and that corporate earnings may have bottomed out. Can this rally sustain? Let us look at key indicators if there is still steam left.

Breadth of the market

The breadth of the market is one of the indicators used to gauge the strength of the rally. Advance Decline ratio measures the number of stocks advancing to the number of stocks declining in the market. As seen from the chart the advance-decline ratio is rising with the rally in Sensex which is a good sign. Traders should look for any divergence in the pattern with respect to Sensex movement in future which may suggest that the market is likely to  peak out.

Chart: Sensex (Left Axis), Advance Decline Ratio (ADR)  (Right Axis)



























New High Low Index

New High Low Index takes into account the number of stocks touching new yearly highs and lows on a trading day. The rising index along with the uptrend in Sensex suggests a powerful rally. The index is moving higher as Sensex scales new high signaling more stocks are hitting new 52-week highs with a broader participation of stocks in the market.



New High Low Index =         Number of stocks touching new highs                                                                                                                (Number of stocks touching new highs + new lows) 
 

 Chart: Sensex (Left Axis), New High Low Index  (Right Axis)

Sentiment Index

Sentiment suggests the mood of the traders and investors in the market. There are two groups of people in the market- Informed and uninformed investors (retail investors).  Informed investors invest when market is trading at lower levels, sentiment is pessimistic and uniformed investors are bearish on the market and opt to invest in fixed deposits. When retail investors invest heavily in the market putting all the money in stocks and expect the market to touch new highs every day is a signal that market is likely to peak out. Unfortunately, no public data is available to measure Sentiment index but the general mood is retail investors are currently still cautious and not invested heavily in the market so far. Another good sign!

CHART: Gold vs Sensex between last Akshaya Tritiya and now

Riken Mehta
moneycontrol.com
 
Follow me on Twitter @mehtariken

After outperforming equities a handsome margin in FY13, gold lost much of its ‘safe haven’ sheen last year, and ended up lagging the Sensex. Prospects for the yellow metal, in comparison to equities, do not look too bright this year too. Investors are betting on a global economic recovery later this year. Also, the Fed is expected to reduce the pace of its monthly bond purchases going ahead. This in turn should strengthen the dollar. Should the much anticipated global economic recovery materialize, equities will be the clear favourites.

Note: Dont use this chart without credits/attribution

Recap 2013: How equities, commodities, currencies performed

Riken Mehta

Follow me on Twitter @mehtariken 

After nearly a six-year wait, Indian equity benchmarks, the BSE 30-share Sensex and the NSE 50-share Nifty broke their record highs this year.  But that’s not it; 2013 saw a number of fresh multi-year record lows/highs both on the macro and investment front.

Despite FIIs investing USD 20 billion in 2013, the index returns for FIIs in dollar terms is negative at 3.91 percent primarily due to rupee depreciation. The year 2013 has been more stock and sector specific with IT, pharma and FMCG leading the list of winners.

Let’s take a look at how various asset classes fared in the year 2013.

Developed markets versus Emerging markets

As seen from the table, benchmark indices of US, UK and Japan have given handsome double digit returns so far this year. The momentum in these markets may continue as major indices of US (barring Nasdaq) and UK (barring CAC) are trading at life-high. Nikkei is trading close to its 6 year high. Emerging markets have posted negative or single digit positive returns this year, underperforming developed markets.














Commodities

Gold has posted its biggest annual loss since 1981 as investors shifted their money from safe haven asset class to risky asset class like equities on the back of strong economic growth in developed countries. Brent Crude remained in a narrow band of USD 95-115 per barrel.



















Currencies

The domestic currencies of the emerging markets depreciated substantially this year on fears of tapering by the US Federal Reserve. The rupee depreciated to a record low of 69 levels making it one of the worst performing Asian currencies this year. Japanese yen on the other hand weakened to a five-year low on the back of loose monetary policy to spur growth in the economy.











Indian Indices

June seasonality: How BSE Sensex has moved in past 20 years

Riken Mehta
Moneycontrol.com

Traditionally, May has not been the best of month for equity investors, with the market declining more often than it has risen. But June seems to be the exact opposite. In last 20 years, the BSE Sensex has risen 14 times in June. This could partly be due to the pessimism in May, and the subsequent covering of short positions. But things don't look too bright for Indian equities this June.

The HSBC Manufacturing Purchasing Managers' Index (PMI) for May declined for the third successive month to hit a 50-month low of 50.1, and the widely held view is that economic recovery could be slower than what was expected.

The rupee is under pressure, political uncertainty looks likely to persist, and there are questions about the continuation of US Federal Reserve’s loose monetary policy, which has been driving the rally in emerging market equities.