The markets closed down 2.1 pc for the week. The Market has closed below its 200 EMA for about 7 days. This is the longest it has closed since the whole Bull Market began in March 2009. Now, what are the implications of all this for all of us?
1. Fixed Deposit Rates have climbed back to 9-10 pc. This makes Equity Markets with its current volatility not a viable option. The Yield on the Nifty is 4.83%. (Inverse of P/E). A 10 year government security gives us 8.24%. This implies debt instruments are more attractive then investing in the markets.
2. The Prices of Petrol have gone up from Rs 48 to Rs 63 and further hikes likely over the weekend. A rise of 33% in a period of 4-5 months.
3. Interest rates have gone up around 200 basis points on home and auto loans. Coupled with further hikes to come, the disposable income in the hands of middle class consumers becomes lesser. Indians by nature are savers and this gives further impetus to the hoarding and spending less.
4. The surprise crisis in Egypt will curb flows to the emerging markets. The importance of Egypt stems from the Suez Canal. If the Suez Canal is closed, the ships will have to traverse a longer distance leading to 40% increase in freight costs.
5. Crude Oil is on a boil. Brent Crude has crossed 100 dollars a barrel to 28 month highs. The Indian oil companies are making under-recoveries about Rs 2 on petrol and Rs 6 on Diesel. I would not be surprised if fuel prices are hiked over the weekend.
6. The RBI is hopelessly behind the yield curve. The Interest Rates should be hiked at a faster rate.
7. The challenges we face now are high inflation, threat to external flows, lack of domestic liquidity. The Real Estate market is showing early signs of going into recession. The Realty Index is down 41% from November highs. The Markets are always 6 months ahead of the ground realities.
8. If the Index hits 5000. There would be a multi -year double top leading to a bear market till Q1 2013 and a target of minimum 3700 o the Nifty which would also be the pre-election gap. I would elaborate this in a separate post.
What do we do now?
There would be a technical bounce back. Use that to lighten equity. Add 10 year G-Sec which could be obtained in the form of Mutual Funds. Stock up on Gold, crude oil (proxy is ONGC ad Cairn) and sit back and watch history being made.