The Rising Tide

NASDAQ CompositeWill the US market ever pause and think? It’s been rising continuously since 2009 with maybe 4 – 5 good sized corrections thrown in for the sake of good order. I think it’s important for its own sake that the market stops and gives us a nice juicy correction. No one for sure knows when it’ll happen, but a significant correction does look probable one day or the other (as probable as the death that awaits us!). This seemingly parabolic rise (y = a * x^2) of the NASDAQ Composite since the past 4 years requires energy for sustenance – which we know has provided by the various strains of the QE program till now. The second chart here is telling – it compares the rise of the NASDAQ composite with our desi NIFTY (the latter quoted in USD) – i.e. the DEFTY vs IXICDEFTY. It’s important to compare against the DEFTY since the fx related variances are removed. Stating the NIFTY in USD is also important to see the impact that the QE has had on the emerging submerging world. The QE has effectively ‘exported’ inflation to the emerging world.

Here’s a link to an article that inter alia contains a beautiful chart on the QE program and explains how the QE now seems to be becoming quite the drag on the US GDP and long term rates than before. So is it a good idea to prepare for the inevitable and be in cash?

Barry Ritholtz discusses a perplexing slice of affluent Americans’ wealth pie that’s worrying them: cash! Are they worried because there is a raging bull market in equities next street? Or are they worried because earnings of companies are increasing? Since when did that become a cause for worry? While I am not an affluent American by any stretch of imagination, this does apply in my case as well. 🙂 I am way too much in cash these days than what the doc prescribed. Yes, I know I am losing money by the minute and I am aware of things like fixed income and its ilk (fixed maturity plans, tax free bonds, etc.) but somehow I have not been able to move myself to lighten my burden. It’s like a sack of sand with a hole at the bottom. The burden does get lighter given the hole called inflation. I have even been called by the “relationship deer headlightsmanagers” of the bank I use and have been lectured on the demerits of keeping cash in the portfolio. To my credit, I listened patiently. But haven’t acted on the tip!

Is being a deer that’s stuck in the headlights a bad thing? I guess it is. Searching for an idea that could be a good use for the cash I have. Waiting for Godot, it seems I am.

The Rupee Squeeze

What an u turn we have seen – of people of all manger of expertise who once extolled the decoupled state of Indian economy during the erstwhile “India Shining” days who are now weighing in with stories of markets being joined at the hip! Local stories do little to educate on what is happening and is going to happen (!) in our local markets. Most local commentators worth their salt correctly look to charts of the SPX, USD, credit in the US etc. as reliable portends of the shape of things to come. The de-couplers of past were certainly wrong – they ignored the big glue that sticks us (and other emerging economies) together with the rest of the birds flying at the head of our skein. That glue, is undoubtedly the currency exchange rate. Take a look at the comparison of the NIFTY vs the DEFTY chart below. I have also charted the ratio of DEFTY over NIFTY – since 1994 each unit of NIFTY is getting you progressively lesser and lesser quantities of DEFTY, indicative of a massive squeeze on the INR.

NIFTY vs DEFTY Jul13DEFTY per NIFTY unit

The human eye searches for patterns where there ought to be none! My untrained eye seems to suggest a great support at 3,000 on the DEFTY. We are ~3,350 currently, so a nice 10% correction would get us there. Possible? I don’t think any expert would be foolhardy enough to put a zero probability for that happening. So, either the INR rises in the immediate term or the market falls on disappointing results or both happen to get the DEFTY down to this level. But yes, as far as patterns and psychological levels of supports go, the 3k mark does provide a nice breather.

Corr Coefficients N day returns vs next N day returnSo if you are trading, the USD:INR is obviously a huge factor to consider. The graph on the right plots the correlations between N day returns (on a given day) and the immediately following Nth day return. The blue line is for the NIFTY N day return correlations while the red line shows this relationship for the DEFTY. For positive value of correlation coefficients, one can expect that given a positive (negative) N day return, the next N day return will also be positive (negative) – i.e. the tendency for the trend to continue. Both the NIFTY and DEFTY data suggests that this correlation peaks at N = 10, implying that given a 10 day trend, it is most likely that the following 10 day period will stay true to that trend. The point here is that from an overseas investor perspective, the relationship is more pronounced as compared to the internal view. NRIs are raking it all in!! Hopefully some of them will fill our reserves with their precious FCY and buy houses here.

Rolling 10 Day Returns NIFTYPlease note – this is median behavior, the N day returns are likely to show a normal distribution with some really fat tails (9/11, bombing of Parliament, Lehman event, etc.). the chart below shows the rolling 10 day return on the NIFTY over time and its 50 period moving average line. The outliers (i.e. the fat tails of the N = 10 day return normal distribution curve) are as high at 26.8% on the positive side and as low as 27.7% on the negative side!! Shouldn’t trading be an Olympic sport?

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