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Apr 13, 2017 04:27 PM IST | Source:

What Jim Rogers didn’t tell you is that Indian market might be topping out

Global fund managers are telling you something that Indian markets might be topping out

If you are a trader two words would intrigue you the most – top and bottom. A top is the highest price reached a stock or an index before it reverses momentum, while a bottom is the lowest point reached by a stock or a security before it starts trending higher.

Markets are dynamic in nature and chance of picking a top or a bottom is unlikely. But, there are signs which can help you make the right decision. Most of the global voices are telling you that the risk-reward equation has become unfavourable.

Analysts’ community not just in India but across the globe is now beginning to question the euphoria which pushed the prices higher on D-Street. There is a very strong possibility that we have either made an intermediate top or maybe nearing a top. A break below 9000 could well change the equation for Indian markets, suggest experts.

One of the world’s best-known investment gurus, Jim Rogers of Rogers Holdings and Beeland Interests, admitted in an interview with Mint said that he may have been too hasty in exiting India in 2015, but says he won’t enter it now when the markets are at record highs.

Rogers says that he will wait because it doesn’t make sense to enter a market when it is on a high. “I don’t want to jump onto a moving train. When you jump onto a moving train, you’ll get hurt.”

Jim Rogers is not the only one to flag off concerns over pricey Indian market. Earlier this week, Abhay Laijawala, Head - India Research at Deutsche Equities said in an interview with CNBC-TV18 said that consensus earnings expectations for FY18 are on the higher side and to that extent, our sense is that until we see earnings expansion, it is difficult for the market to re-rate.

“We have a December-end target of 29,000 on the S&P BSE Sensex." He further added that in the next 12 months we will witness a transition from a developing world system to a better than developed world system and that will have some impact which could lead to near-term disruptions,” he said.

Why too much of skepticism?

I am sure everybody must have heard this famous line, “If it is too good to be true then something is wrong”. Indian market is trading at an important inflection point where Nifty already scaled a record high of 9,273.90 earlier in the month of April while Sensex had a touch and go moment with mount 30K, but still far off from record high of 30,024.74.

There is a lot of positives working for the Indian market which has given legs to this rally in the past 2 years. The hope trade can only carry forward till a certain point after that reality takes over and that is when investors and traders find themselves on the wrong end of the trade.

It makes sense for investors to take a step back and analyse the situation. The Nifty rose nearly 19 percent in the FY17 and broader market such as the S&P BSE midcap and smallcap stocks rose over 30 percent in the same period supported by strong liquidity both by DIIs and FIIs.

“Markets never move in a straight line and little bit of health cynicism is required at this time because everything just looks right and everybody is beaming with confidence that we are in for a golden decade. The Nifty is up 22 percent in the trailing year while Nifty Junior and midcap index up 35-40 percent,” Dipen Sheth, Head, Institutional Research at HDFC Securities said in an interview with CNBC-TV18.

“Combined inflows into equities over FY17 were over Rs 85,000 crore which was higher than since FY11, macros are stable, interest rates are low while there is stability in the political climate. But, remember this is a hope trade barring few sectors where data is available for example infra spend by the government or the rural spend by govt,” he said.

Sheth further added that we have been playing this hope trade for the last two years, but we can’t continue playing this for 5 years of this government.

Retail investors are back on D-Street which is evident from the flows MFs are receiving on a monthly basis. MFs saw a huge gush of liquidity in the last 12 months and this is evident from the average assets under management (AUM) of 42 fund houses which has swollen to Rs 18.3 lakh crore, an all-time high, compared to Rs 13.5 lakh crore as of March 2016.

Given the fact that markets are trading at record highs which most fund managers also understand, they are reluctant to put everything in equities at current levels and wait for some decline before going in.

“We have seen customer base increasing every month. The number of investors that we have actually doubled in the last 12 months as new people have entered the market. When market trade at record highs the expectations are also like that which needs to be toned down,” Nimesh Shah, MD & CEO, ICICI Prudential AMC said in an interview with CNBC-TV18.

Shah further explains that we are trying to bring down expectation of investors which are investing at current levels. We putting a large part of the money in debt and the rest in equities. The structure will reverse when we see a significant correction in markets.

Trend might reverse if Nifty slips below 9040

Given that the markets have scaled new all-time highs in what has been a directional one-way march last few months there is a growing degree of skepticism about the sustainability of this upmove and worries that we may see a significant correction if not a reversal shortly are gaining momentum.

“If one were to look at the charts and not be swayed by the fear of heights alone there seems to be growing evidence to support the prophecies of an imminent collapse. Almost all significant market peaks dating back to the great market highs of 2000 have been presaged by perceptible RSI divergences which is now in evidence on the Nifty's Daily chart,” Kunal Saraogi, CEO, told moneycontrol.

“This clearly does not bode too well and is reason enough to for investors to get into 'Risk Off' mode. So what should one do? At the risk of sounding alarmist, the safe thing to do would be to prune down your portfolio in case the Cassandras have got it right but remember divergences last for months at times like it did in the run-up to the 2008's great crash,” he said.

It is always more sensible to wait for the index to break a key level before you rush for the exit door. That level is 9,040 on the Nifty. “As long as Nifty stays above this level, remain cautious and as soon as it breaks it reach for the eject button!” concludes Saraogi.
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