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Down Trend is Imminent:The upward rally gave unrealistically
high returns in short span of 6 months as on lastweek of October,
where the returns are approximately 90 to 110% across all
emergingmarkets like Brazil, China, Taiwan, India, Hong Kong,
Singapore and few morecountries. Achieving nearly 100% return on
emerging markets in less than 6 months is
BUBBLY. China, Hong Kong, Singapore, Brazil and India gave
almost 100% returnswithin 5 months whereas Shanghai Composite
(China) fell sharply by 25% during themonth of August. As the size
of rally is substantial in percentage as well as in absoluteterms
then the law of gravity is applicable to every market, which means
heavy fall inequity markets should take place anytime during first
quarter of 2010 as we wereexpecting it to happen in last quarter of
2009. DJIA is currently in 4th primary wave andthe final 5th
primary wave downwards should start anytime in near future and
shouldcomplete at 5400 level or higher bottom at 7550 during the
year 2010. BSE Sensexshould have been peaked out at 15450 levels
which proved to be incorrect since then ithad touched 17400. The
current correction of upward rally in equity markets are headingfor
next round of down turn which could be double bottom formation,
higher bottom and
even lower bottom depending upon country to country, before a
long term secular bullmarkets take their own shape. Correction
between 50 to 65 % of the rise can take place asthe time shall tell
but without a meaningful percentage fall, long term secular bull
marketcannot develop. DJIA and some European equity markets can
make new lows. Gold hasbehaved as per the expectation of our
earlier article where it breached upwards 1030 after18 months. Gold
should set for 1450 before a meaningful correction will take place.
USDollar Index also turned from the bottom of 74 levels and should
stabilize around 88. USDollar Index behaved as per our expectation
in last article where it should rebound fromthe range of 72.5 to 75
and it should set for the target of 90 by mid of year
2010.Commodities should fall as correction to the rise.
Simultaneously, equity markets wouldbehave in tandem with
commodities.
Technically speaking:Dow Jones Industrial Average (DJIA)Current
Level 10500Bottom 6550Resistance 10800Long Term Target of 7550
(Revised)DJIA has broken all the major resistances and it could
surprise by going upto 10800thereafter it could fall upto 7550. It
is passing the stage of fourth primary wave of longbear market and
shall move towards the fifth wave of primary movement after
theupward correction is completed. 1996 level of 5400 shows the
strong support for DJIA.
Somehow, 7550 stands as a strong support.Medium term target is
at 7550. Short term target is achieving nearly at 10800.Sell is
recommended for DJIA.
Straits Times Index (STI)Current Level 2810Bottom 1450Support
1900
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Resistance 2830STI moved up from the bottom of 1456 to 2810
where it broke the major resistances. SoSTI level of 1910 become
the strong support for STI and 65% correction of entire
upwardrally. It has achieved the target stated in our May09 article
which states the target of2830. It seems that STI made a peak at
2810 as 5 waves Dow Theory is completed.
Sell is recommended at current level with support at around 1910
level.
Hang Sang Index (HSI)Current Level 22250Bottom 11300Support
15600Resistance 22800HSI moved up from the bottom of 11350 to 22250
where it has achieved our May09article which states 20800 levels.
So index level of 15600, become the strong support forHSI and 1/2
correction of entire upward rally.Sell is recommended at current
level with support at around 15600 levels.
BSE Sensex (BSE)Current Level 17400Bottom 8150Support
12200Resistance 17500BSE moved up from the bottom of 8150 to 17400
where it broke the major resistances. Italso touched our target of
15450 twice since 5th June and even superseded upto 17400.The
target was stated in our article of May09. There is also gap formed
at 12200 and11400 levels. So, index level from 11100 to 12200,
become the strong support for BSEand 50 to 65 % correction of the
entire rally. There is also monthly gap up opening from11400 as on
4th May09 and a big 17.50% gap up opening on 18 th May09. The gap
is at12200, which shall fill at the time of correction.Sell is
recommended at current level with support at around 11400
levels.
Fundamentally speaking, emerging markets (EMs) reached the PE
ratio of 8 during thebottom of the bear fall which is an indicator
of over pessimism in the equity marketswhich ended in mid March,
2009. The pessimism gripped the markets all over the worldwith high
negative bias which was all of a sudden. Commodity and equity
markets fellsharply throughout 2008. Five year BULL market got
heavy correction within the span of26 months. EMs fell as much as
65% from the top of October 07 to January 08depending upon country
to country. They bottomed out between October and November2008.
Ultimately DJIA, European markets and EMs finished their respective
downfall bymid March09. Stock markets of Brazil, Taiwan and China
bottomed out earlier thanother world equity markets. The PE ratio
disparity between DJIA and EMs has narroweddown rather the later
has premium of 10% over DJIA. The projection of EPS for DJIA bythe
end of 2009 is approximately US$ 660 (revised from 540) which
discounted at PEratio of 11 would result in 7250 levels. Historical
data shows that during the bear marketsin USA which prevailed
during the twentieth century (Crash of 1929 and Crash of 1970swhich
longed for more than 15 years), PE ratio swung between 8 and 14.
The median of
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PE ratio for the century remained at 15. Looking at the
historical PE ratios during gloomyscenario, it can be said that
DJIA can touch for a short while the level of 5400 which is8.5 PE
multiple. Such low PE ratios could occur due to irrational
behaviour of stockmarkets which do happen occasionally at the times
of over pessimism. Sorecommendation on DJIA is bearish.
The standard fair valuation of the equity markets should have
average PE ratio between12 and 14. Current levels of the EMs
represent PE ratio between 17 and 19 which couldbe an opportunity
to sell in equities with medium term aim to buy it later. During
thecorrection period of bear market where the current upward rally
is witnessing one, itshould be an opportunity to sell. The pace at
which EMs have performed is not healthybecause it is driven due to
sudden excess liquidity in the world markets and fall in USDollar
Index which will ease down as the time will pass. Stimulus package
by variousleading countries and cash for clunkers in USA are like
steroids medicine which willhave temporary effect but very bad long
term side effects. Deficit in USA will risesubstantially by giving
tax breaks, stimulus package to financial sector, cash for
clunkers
in automobile industry and such other packages to boost economy.
Growth in theeconomy should take place naturally with good
investment confidence. Such boosterpackages by the governments
cannot last long the growth as it is one time dosage and notongoing
process like the business climate. So eventually markets would
movedownwards as soon as the booster effect is over. Handsome and
fast returns in equities inshort span from the bottom within two
quarters of a year is bubbly. Supernatural rewardhas to succumb to
the law of gravity, hence fall in equities as well as all asset
markets.
The percentage jump of all EMs is nearly 90 to 110% around the
world so BSE Sensex isno exception. Since 1st week of June09, it
had touched 15500 and since then it made anew peak of 17400 during
mid-October month. As the fall should set in anytime in thenear
future, first 200 moving average should stand as strong long term
support for theEMs then their respective levels. BSE Sensex was the
only exception in the world whereit gave 100% return in 3 months
whereas other EMs were under performing at the sametime. During the
mid month of August09, majority of the EMs achieved their targets
asstated in our March and May articles as well as they gave 100%
returns. As on today BSESensex and all other major EMs are giving
more or less same returns and major fallshould set in anytime from
now. The story in 2010 should play out between PE of 12 to17 where
level of 12 PE should hold as strong support. Time correction is
also necessaryalong with price correction for 5 year big bull
market from 2003 to 2007 which shouldget over by 1st quarter of
2010. We are into middle of big upward commodity boom cyclewhere
inflation shall reach such heights that the citizens of respective
countries woulddisgruntle. USA and European countries could face
major deterioration in their currenciesand reserves where crisis
like situation can arise. Gold is a fiat currency so it has to
goonly up.
By Ankur Sharda
http://www.scribd.com/doc/6014281/A-Guide-For-Discerning-Investor
www.myspace.com/ankursharda
http://www.scribd.com/doc/6014281/A-Guide-For-Discerning-Investorhttp://www.myspace.com/ankurshardahttp://www.scribd.com/doc/6014281/A-Guide-For-Discerning-Investorhttp://www.myspace.com/ankursharda
