We have repeatedly said that India should be high on your watchlist in 2016. Well, we have news for our readers: India has entered the buy zone. Which indicators are we watching for a final confirmation before entering a position in India’s index?
Befor answering that last question, let’s take a look at India’s chart. The Nifty 50 Index is very close to test its long term trend line. Percentage-wise, we are about 1.5% from huge support. This is obviously an area with the highest profit potential, provided that support holds. We also see on the chart that the Nifty 50 Index has broken through its long term trend since last summer, the 90 week moving average we watch. This formation looks very similar to the breakdown in 2011/2012.
As said before, India has the highest potential among emerging markets, given the combination of very high real GDP growth (+7% last year) and excellent chart setup.
The first indicator we are watching before entering a long position in India is the Emerging Markets Index, represented by the EEM. As its chart shows, it has broken down recently through a secular trend line. This is definitely NOT constructive, and ‘in normal circumstances’ we would think this is a huge bear market unfolding. However, we have doubts that this is a legitimate breakdown. Our belief is that this breakdown is false, as explained below. As long as EEM does not recover, however, this remains a breakdown, and we do not engage in any position in emerging markets.
The reason why we believe that the breakdown in EEM could be ‘false’ is that it is largely driven by crude’s crash, which, obviously, is ‘irrational’ (read: exaggerated). We have illustrated before that THE driver of falling stock markets is crude oil, as the correlation between the S&P 500 and crude oil is particularly high as soon as crude falls +10% in two weeks time. Now the correlation between crude and emerging markets is much more outspoken, and only limited to periods in which crude is heavily sold. As the next chart shows, crude and emerging markets are highly correlated.
We explained that crude oil is as oversold as it can be. From a secular perspective, all indicators are in extreme territory, suggesting crude’s crash is stopping right here right now. If that holds true, then emerging markets will stop their decline, and India is the market with the lowest risk highest reward setup.
