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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.

Relative Rupee

Someone quoted on Twitter that the Rupee is not likely to fall as much as the dollar index will rise. That reminded me of the Relative Rupee indicator that I have been plotting since 2006 to call on inflation. This is the USDINR/DXY ratio and everytime it overshoots on the upside inflation follows. So here is a chart. Where are we? Since 2001 we are in a rising channel. Prior to that the trend was almost vertically up. But since then we move up and down this channel through periods of super INR weakness and then relative strength. The last major run up was from 2010-2013 and I forecast that on Indiacharts live. in 2015 too I put out this chart and the indicator did rise but not anything to cheer about. So now as the indicator comes closer to the lower end of the channel I think it is time that the INR starts beating the DXY in the dollar game. this should mean a period of major moves up in the USDINR that beat the DXY to it if the lower line holds in the coming weeks.

rr-161216

US 30 year T Bonds

US Bonds remain very oversold, and yesterdays dip does not change that. Momentum divergences continue as ROC shows loss of downward momentum but the lower top bottom formation is still to break to allow for a move up to start

bonds-151216

Bonds and Equities

After 2 weeks of trying to rally the US 10 year bonds are out of oversold territory on the RSI indicator. The 30 year bonds broke the low then were holding on to. So either the inter market divergence causes a bottom and a rally in bonds and a decline in US stocks. Or bonds resume their crash in which case this would be the largest decline in the US bond market since the 2013 Taper tantrum. I do not have to remind you what impact it had in 2013 on our bond and currency markets. So we remain critically poised. Add to that a rally in the dollar. So both the scenarios here of what happens next to the bond market in the US is not good for India, as it would impact us one way or another. For this reason I see no good news for us in the strong US and European stock markets recently. The wave counts below show that if new lows are made in the 10 year note this week it would be wave 5 subdividing into 5 waves itself. In other words the market adds 3 more waves down from here before it is complete, and could last for several weeks.

notes-111216

 The 30 year bond did make a new low so here is an upside down chart and an attempt to change the counts to an extention.

bonds-111216

And lastly i should also show a chart of 1987. The 1987 US stock market crash was preceded by a huge move in the bond market down that saw equities fly. Up until the point that it tipped over. The horizontal line marks the top of US Dow index [blue chart], at that point rising rates in the bond markets finally tipped the stock market lower and they both started to fall together. So while the current trade of sell bonds and buy stocks sounds great, there is a tipping point for bond yields when it will also hurt US stocks.

chart1987

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