Market warns - 18 May 2006

After yesterday's market, everybody would have thought...wow bull market is back. But look at how US market has fallen, and with it, there is a massive sell off in Asian markets. If market goes down today, it's a confirmation that we are not going to go up for time being with 3700 as major barrier for some time to come. It's a Sell on rally market. (Please read my yesterday outlook, and that's precisely I mentioned)

Why there is a sell of in US market?

The US Labor Department reported April CPI +0.6% and Core CPI +0.3%. On a seasonally-adjusted basis, the CPI is up 5.1% in 2006, compared to a rise of 3.4% in 2005. In layman terms, threat of inflation is for real. So, Fed may not pause and tighten the US economy by raising interest rates. Rising rates are not good for economy, as they slow down consumer spending, and eventually hit corporate profits and workforce reduction. US may see a slow down in second half of CY 2006.

Why it will lead to sell off in Asia and Emerging markets?

Asian economy is export oriented and slow down in US means lower exports, and hence direct impact on these economies. Rising interest rates also means liquidity problem, and emerging markets is the first asset class that gets hit by liquidity tightening.

Why inflation threat has come up suddenly?

The markets clearly chose to ignore the outlook of most economists in past few months and believed that "there is little/no inflation" or that "inflation is under control". 4% inflation - doesn't it sound good? Look around, do you see prices rising by just 4%. All agricultural commodities have shot up the roof, forget about non agricultural stuff.

There is massive inflation and that the government measures are grossly underestimating it.

Problem - Central Banks all across the world measure inflation in a wrong way.

I guess the problem of inflation is even more bigger in India as we are still keeping the oil price shock away from economy. Atleast, that's what politicians think. I call this instant gratification for delayed shock. We should be ready for massive economic shock because of this ridiculous policy. If prices of oil would have increased in small doses, atleast our economy would have absorbed it in a gradual way, may be with a mild slow down. Now, lets understand the implication of not increasing oil price -

1. Current account deficit is widening because of huge oil import bill. It will keep pressure on rupee; and will increase inflation.

2. Government will have to eventually fund the deficit oil companies are facing - by issuing bonds or raising taxes. Both these measure mean cost of capital will rise, as there will be more demand for money. Government has already made its intention clear on tax exemptions - so we must get ready to pay more taxes. Higher taxes, and higher interest rates mean slow down in consumer spending in India too.

India is still in a secular growth phase, but I fear the current Government is doing all it can do to screw us big time, and global help is also on the way in terms of US completely screwing their economy by first creating a massive inflation.

What's the outlook for the day?

Massive Sell off. I hope I am wrong.

The issue is how come one day everyone is bullish and market goes up by 300+ points, and next day there is a threat of massive sell off. I call it intense battle between bulls and bears. Bears are still scared of bulls, as they have been beaten handsomely by bulls in recent past, and this volatility will continue till one side comprehensively defeats other. Economic indicators suggest bears will have more upper hand atleast for next few months.

source: e-group friends

cheers,
nkpanjiyar

hi man,
bang on!
this forum needs more guys like u and Amitbe. who can read mkt and give real good calls.
good stuff. keep it up.
any guess how far this mkt can go down.
regards

Thank you nkp.
Excellent article for a lay man.Forum members to be careful.
comments from TAS esp VV is eagerly awaited & it is time Traderji breaks his silence & offers his opinion for the benifit of members.
Good luck,
ranga

Great write-up,NK........time for extreme caution.This is not a buy the mini-dips market.We are forming lower pivot highs on the daily.We have a negation of yesterday's wide range bullish bar which shows bear strength.We are trading below the 20ema,matter of time before the 50ema gets hit.

Caution for intermediate players especially..........am sure by now short term players are out of all longs and shorting every rally.A break of 3382 is confirmed downtrend.

So,once again,time for caution.

Saint

thanks Saint for immediate analysis & posting too.No ambiguity in advise which is exactly what is required.
ranga

NKP.. very good analysis and insight into what is going to happen...

I feel for a longterm investor it is an opportunity to pick up some valuable scrips at low prices.. I would look forward to some more slide-down..

Regards

Good stuff for a layman like me......
The market saw a 240+ downside today....a sign of further drift downways.....and top of this, taxation issues may take it further down...

I pray, it recovers soon...
ganeshhity

saint,
This level was broken today...nifty closed at 3391 after recovering a bit...
A real bell for all now..thanks for all of your posts...

ganeshhity

The issue is how come one day everyone is bullish and market goes up by 300+ points, and next day there is a threat of massive sell off. I call it intense battle between bulls and bears. Bears are still scared of bulls, as they have been beaten handsomely by bulls in recent past, and this volatility will continue till one side comprehensively defeats other. Economic indicators suggest bears will have more upper hand atleast for next few months.

cheers,
nkpanjiyar[/quote]

Man please gimme the name of the e-group and on which site is it . Would be a goldmine of knowledge for beginners like me .

Harsh

Harsh,

You meant Goldmine for Tips? looks like this forum is not sufficient for you to gain knowledge.

Satya