Looking Bullish

The month of June turned out to be a very interesting one for the markets where the markets sold off in the early part of the month due to negative news flow on global markets as well as the biggest concern over the last few months i.e. inflation. In the middle of the month there was also news flow on the review of the Double Taxation Avoidance Treaty with Mauritius which resulted in a selloff in the markets that took the markets to the February/March lows. This fulfilled one of the criteria that I had in mind and had anticipated for a final market bottoming, which was a re-test of the lows made earlier during the year as it was a necessary condition to make the bears confident and create negative sentiments in the markets. Infact, on the 28th of June, we saw cash market volumes touch 28 month lows which also confirmed another necessary criteria for a market to bottom and which is to have a phase of total apathy towards equity which we have seen for some time now and which finally seems to have reached its crescendo.
As a result of this in the third week of June we saw a poll of market participants and Fund managers predicting a fall in the markets to levels of 15,000 for the Sensex by the end of the year. That was the exact day on which the markets actually bottomed out. A similar poll in early January had seen consensus forecasts of markets being at 22,000 to 24,000 for the Sensex by the end of 2011.
Overall the markets ended the month up by around 2% and the mid cap indices ended the month down by around 1%.
The markets at this point of time seem to have discounted most of the negative news flow and most of it seems to have been discounted in the markets. The factors contributing to the downward risks for the Indian economy have now bottomed out. Factors related to the Telecom scam as well as slowdown in policy making from the side of the government seem to have been well discounted into the markets. Inflation seems to have peaked out now and the figures that will be released for June should be the peak for the current economic cycle. Global factors that have affected the Indian markets negatively have largely surrounded developments in the MENA region as well as issues related to the troubled countries in the Euro zone. With Greece passing the austerity package on the last day of the month we seem to have seen the bottoming of these concerns in the short run i.e. for the next three months. However long term concerns are alive and will rear their head sometime in the future.
As investors look at the markets today, they should look at what the year 2012-13 will be rather than what the immediate prospects will be. The commodity cycle seems to have clearly topped out for now and factors such as a slowdown in the global economy as well as seriousness by China in controlling inflation in its economy and also in preventing overheating concerns will prevent any big upsurge in commodity prices any time soon. With the US Federal Reserve also through with its money printing binge (again for now at least) the upside risks to commodity prices due to increasing liquidity has also reduced. Policy makers in the most prominent economies are also recognizing the adverse role of commodity speculation in creating commodity bubbles and its impact on threatening the fledgling recovery in the global economy. We could see restrictions coming on commodity trading or on bank funding of commodity hedge funds at some stage if prices starts shooting up again as leaders of many prominent countries have spoken about it in the recent past.
Typically markets start doing well in anticipation of improving margins and growth prospects. Next year will see companies improve margins as input prices start to come down and previous price pressures get passed on. The impact of higher interest costs will also wear off next year; both due to the base affect as well interest rates that should be lower by at least 150 to 200 basis points at the same time next year.
In the near term I expect markets to rally by another 10% over the next 6-8 weeks as the excess cash on the sidelines gets deployed and a bout of short covering starts in the markets. The next few days could see the large caps move sideways while mid cap stocks do a catching up. As such July could be much better for mid cap stocks. Movement of the markets beyond 6100-6200 levels looks difficult at this stage as every market up move is accompanied by an up move in commodities that again raises inflationary fears. A stable to less steep commodity price up move will be necessary for markets to move to new highs and will be something to monitor.
Gold seems to be topping out as of now, I will write on this more in detail shortly. The key will be to see if it is a medium or long term top.
The markets are setting up for a very strong upmove in the second half of 2011 and there is likely to be a reversal of the Buy Developed markets and sell Emerging Markets trade in this time period.

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