Inter Market Analysis

Inter market analysis is a series of articles studying related segments of the market to identify lead lags between trends in each segment. This can often forewarn you of impending changes in trend and allow for planning of required action based on it. For example midcaps v/s large caps, currencies v/s commodities and US markets v/s European markets and so on. In a global environment inter-market relationships are not restricted to a country but between countries and their respective asset classes as well.

Nifty Midcap 100 Free

Nifty Midcap 100, closed the day down, completing 5 waves up from the June low and wave C up from the May bottom. The NSE midcap/smallcap indices did not make new highs like the BSE indices this month. But the wave structure is the same. Momentum indicators have still to confirm a trend reversal from this high but wave wise indications are that we should start a major move lower in the Midcaps from the double top near 18500.


US 30 year Treasury bonds

The US 30 year bonds bounced back to the channel trendline. A pullback maybe complete as they can technically at such a level. The wave iv high at 153.78 maybe the best case scenario if we go any higher. Else wave III down should start and go below the March 2017 bottom, a new low for the year. Meaning a new high in US rates again very soon.


Litmus Test - 200 DMA

Nifty is making new highs. Everyone is waiting for Magic number 10,000 on Nifty. Like it is going to make any difference to their portfolios. Yes I understand if you are a Nifty trader. But when you see the charts below it is clear that stocks are increasingly not participating on the way up and it could affect your performance. This theme is catching up and made a headline in the TOI today as well.


To test the market internals we often look at things like A/D PCR etc. But diffusion indices that run a query across stocks are a good measure of internal strength as well. So in 2015 when I observed stocks falling against the market and was able to spot them, it was a surprise to see nifty give back 7-8% in a correction and then make a new high. The test of how many stocks are above the 200 day exponential average showed a clear declining trend for 3 quarters into the March 2015 top before the trend reversed for the next one year, to lose 25%. Now such a long lag between performance is not always the norm and maybe rare. Maybe it was the Modi effect.

So I share with you current data included since then. First a Table. Notice that the Sept 2016 top was preceded by only a one quarter reversal in the Data, marked in yellow. It was followed by a 12% correction. Which is normal. What we have today is a 1 quarter down from March to June. The number of stocks above the 200 day exponential average are down for both the Market and the A group. For the A group I use all the 299 stocks however for the Market I filter the most liquid stocks as on 30/06/2014. Why this date? Because the broad market was most active then so the liquidity filter throws up 1266 stocks that traded at least 10k shares and had a price >10. That list has now reduced to 1222 over the last year as some stocks lack data or lost volumes. Have made that adjustment from last year. The point made out clearly is that the Nifty is making new highs for the last quarter even as stocks are giving up and turning down one at a time. Most of the index gains come from the narrow list above.


The above data can also be seen as a chart below along with the Sensex quarterly close. When you see this you may also note the larger degree divergence. In June 2014 97% of A group stocks and 93% of liquid stocks were above the 200dma. The March 2017 readings are 70% for A group and 57% for all stocks. The lower reading and decline in June 2017 makes it look like a negative divergence with the market as of now. Clearly it is not a good sign for the medium term health of the market. 


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