AI Bubble: Dotcom Bust Deja Vu

 The AI boom is driving the US, South Korean and Taiwan stock markets. How much is real and how much is froth? Are there similarities with the Dot Com Boom and Bust.

Let us look at the similarities:

1. In the period 1999 to 2000, all IT stocks went up multiple times. The hypothesis was that the world was going to run on IT and Internet, The crash that followed brought the Nasdaq down 77 pc. It took Nasdaq about 15 years to go to the previous highs.

2. IT did enable and empower the way we work, live and became the dominant industry in the next 20 25 years. The real issue was that the valuations ran fast ahead of the fundamentals.

3. AI the similarities are too similar to ignore. The valuations have run far ahead of the fundamentals. Markets like South Korea and Taiwan especially have gone up 100 pc in this year.

4. AI will be an integral part of our lives going forward, make no mistake. It is only that the valuations have run far ahead. Also, companies like Nvidia have doubled in the past 2 years.

I see a meltdown coming up in next 6 months to 1 year in the AI Bubble.

If one needs to play the AI theme, we have to look at electricity generators, electrical equipment makers as AI and Datacentres are going to consume lots of electricity.

Update on Elliot Wave Analysis

 In the analysis done in July, we had studied the Elliot progress.

https://money-manthan.blogspot.com/2026/06/nifty-rally-elliot-perspective-of-it.html

To summarize this progress:

1. Wave 1 was 22282 to 24601

2. Wave 2 was 24601 to 23070

3. Wave 3 started at 23070.

Wave 3.1 23070 to 24531

Wave 3.2 24531 to 23606

Wave 3.3 should be 25970.

So, the next interim targets should be 25800 to 26000.

Wave 3.3.1 would be ongoing currently. If this analysis is correct then the month of August would be range bound between 24000 and 25000 as the first 2 waves of wave 3 are ongoing.

Triggers for a new High in the markets

 The Indian markets hit a low towards the end of March 2026 and since then have risen. Let us examine the factors which could lead to the markets hitting new highs in this year from a fundamental point of view.

1. Easing Crude Oil prices

    Ever since the war ended, the crude prices have moderated to reasonable levels. This eases the pressure on the Indian economy for the time being. We are in a multi year commodity bull market but stable crude oil prices can help propel the markets higher.

2. India US Trade Agreement finalization

    There are indications that the trade deal will be finalized and finally signed soon. That is a huge trigger for the markets. Long Term benefits remain to be seen but signing of the trade deal is a sentiment booster.

3. Unravelling of the AI Trade

    This is the most significant trigger for me. Liquidity has chased Korea and Taiwan and these markets have boomed. FIIs have taken money out of Indian markets. The FII ownership of Indian stocks has fallen to multi year lows. There are now noises of FIIs returning to India and July has been positive so far. This would be a major trigger for the markets to rise.

Low crude oil prices, progress on the Indo US trade deal front, FIIs returning and decent monsoons are the key triggers for a short rally in the markets towards new highs. 

Another point to note that the Nifty may be 10 pc down from all time highs but the mid cap and small cap indices are almost at ATH.

Nifty Rally: An Elliot perspective of it

 The market has rallied from the bottom made on March 30th. After a corrective pause in the month of May and early June, it has again rallied. In terms of wave counts, let us see where we are.

1. The bottom of 22282 was made on March 30th. The rally from this point extended to a high of 24601 on April 21st. 

2. The markets spent the next 47 days in a corrective phase which ended with a low of 23070 on June 8th.

3. The markets corrected around 66 pc. 

4. If we take 22282-24601 as wave 1 then, 

                     24601-23070 as wave 2, then the wave 3 has commenced.

5. Wave 3s are a minimum of 1.618 of wave 1. So if our count is right then the next target for the nifty within the next 2 months will be 26821.

6. The region between 26400 and 26800 is an interesting areas since there has been multiple market tops in this region between September 2024 and Jan 2026. This will lead everybody guessing if it is the final top or the markets can go higher.

      

USD INR and Nifty co relation

 The USD/INR exchange rate and the Nifty 50 generally share an inverse relationship in the short term, but are largely uncorrelated in the long term. When the USD strengthens against the INR (the exchange rate goes up), the Nifty tends to fall, and vice versa.

In the short term, this relationship is primarily driven by Foreign Institutional Investors (FIIs)

Capital Flight: When foreign investors pull money out of Indian equities, they sell Nifty stocks and convert their rupees back to dollars. This heavy selling drops the Nifty and simultaneously increases the demand for USD, causing the USD/INR rate to rise

Capital Influx: Conversely, when global liquidity is high and FIIs pour funds into Indian markets, they buy rupees to invest in Nifty stocks. This pushes the Nifty up and the USD/INR rate down.

Long-Term Decoupling

Over longer horizons (e.g., 5+ years), the two usually diverge: 

• Structural Fundamentals: Over time, the Nifty is driven by the earnings growth and economic fundamentals of its underlying companies.
• Currency Depreciation: The Indian Rupee naturally experiences gradual depreciation against the USD to account for inflation differentials. However, this gradual weakening is often beneficial for Nifty heavyweights with global exposure (like IT and Pharma) because it boosts their export revenues.

Diverging Trends

Occasionally, the traditional inverse correlation breaks down. For example, during certain periods of global commodity shocks (like rising crude oil prices), a weak rupee can drag down the broader Nifty despite heavy corporate earnings growth, temporarily altering standard correlations

Why this is important?

The Government has removed the capital gains tax for foreign money on G Secs. This is expected to bring an influx of dollars and a stronger rupee. 

A strengthening rupee often leads to a stock market rally. Hence watch the rupee.

Nifty - Perspective from Elliot Wave

The markets are currently moving aimlessly. There seems to be no clear cut direction right now. Let us look from the Elliot perspective. 

1. The markets made a significant low of 22182 on April 2nd. It rallied from there to 24602 on April 21st. From there in 1 month, it has come down to a low of 23262 on May 13th.

2. If we take 22182 - 24602 as wave 1, it covered about 2420 points. Corrective targets down would be 23670, 23392 and 23105.

3. Only 23105 remains pending. Below 22700 we are headed towards new lows and above 24118 we are headed towards new highs.

4. The area 24300-24600 was a massive support zone earlier and it will not clear that very easily.

In a nutshell, the markets have taken more time to correct but not yet breached the 61.8 pc of the up move. The 3rd wave when it starts would be a powerful up move taking us to new highs.

Commodities - The ongoing boom and the next opportunity

 Commodities have entered into a secular bull run. With the help of a few charts, I will demonstrate how in the last 10 years commodities have gone multiple times.

It started with precious metals like Gold and Silver.

 

Then it extended to crude oil and metals like copper. Charts are shown below:

Now, the boom is spreading to agri commodities like rubber, cotton and so on. You can track these prices here:

https://tradingeconomics.com/commodities

The whole objective of this exercise is to identify stocks from these sectors and bet on them to make a killing from multi baggers.

What do the Elliot waves say?

Last week, we focused on RSI as a Buy or Sell signal. This week, let us look at what the Elliot waves say.

Elliot helps in taking a longer term view of the markets.

The chart is of the entire up move started from Covid low bottom of 

Wave 1 7552 - 18604= 11052 points. This took approx 19 months)

Wave 2 18604- 15191= 3413 points (31 pc correction) approx 8 months

Wave 3 15191 and ongoing since July 2022.

Wave 3 targets could be 26243, 29249 or 31760

Elliot does not put too much focus on the time lines but on price.

Implications for the longer term:

Once Wave 3 gets over at approx 29k then entire up move from 15k to 29 k will corrected. This can easily take 12 to 18 months. Post this 1 more rally of 10 12 K points and then a multi year correction.

Let us re visit this hypothesis end of May when the wave 3 will be closer to maturity.

The importance of RSI as a Buy Sell Signal

 The markets give us multiple opportunities to buy and sell. How do we know when to buy and when to sell? Let us explore that.

There is a simple technical indicator available called RSI. Readings over 70 means markets or stocks are overbought and readings below 30 are an indication of markets or stocks being oversold and a time to buy.

Let us look at a couple of charts of Nifty on daily and weekly basis to illustrate this.

On the daily timeframe in the last 3 years, there have been at least 5 sell opportunities and 3 buy opportunities.

Let us look at the weekly chart below:

 

Here also, in last 10 years, at least 4 Sell and 3 buy opportunities have come. In Weekly RSI, these are opportunities for a bigger rally and the current opportunity is a similar one.

You can explore further using the below link:

https://stockcharts.com/sc3/ui/?s=%24NIFTY

Bottomline:

RSI is a very simple and powerful technical indicator to identify Buy and Sell opportunities. This is independent of the fundamentals and purely on Technicals.

 

Target 25 K Nifty Achieved. Book Profits

 On May 15th 2024, when Nifty was around 22K, I had given a target of 25k. The target is achieved and now one can book profits.

I expect some kind of correction before the next leg up.