Down Trend is waiting for confirmation

The upward rally gave unrealistically high returns in short span of 6 months as on last week of October, where the returns are approximately 90 to 110% across all emerging markets like Brazil, China, Taiwan, India, Hong Kong, Singapore and few more countries. Achieving nearly 100% return on emerging markets in less than 6 months is BUBBLY. China, Hong Kong, Singapore, Brazil and India gave almost 100% returns within 5 months whereas Shanghai Composite (China) fell sharply by 25% during the month of August. As the size of rally is substantial in percentage as well as in absolute terms then the law of gravity is applicable to every market, which means fall in equity markets should take place anytime during last quarter of 2009. DJIA is currently in 4th primary wave and the final 5th primary wave downwards should start anytime in near future and should complete at 5400 level or double bottom at 6550 by the end of 2010. BSE Sensex should have been peaked out at 15450 levels which proved to be incorrect since then it has touched 17400. The current correction of upward rally in equity markets are heading for next round of down turn which could be double bottom formation, higher bottom and even lower bottom depending upon country to country, before a long term secular bull markets take their own shape. Correction between 50 to 65 % of the rise can take place as the time shall tell but without a meaningful percentage fall, long term secular bull market cannot develop. DJIA and some European equity markets can make new lows. Gold has not appreciated as per the expectation but shall remain range bound between US$ 730 to 1000 for the next 18 months. US Dollar Index should rebound from the range of 72.5 to 75 and it should set for the target of 92.5 by mid of year 2010. Commodities should fall as correction to the rise. Simultaneously, equity markets would behave in tandem with commodities. Technically speaking: Dow Jones Industrial Average (DJIA) Current Level 10070 Bottom 6550 Resistance 9800 Long Term Target of 5400 to 6500 DJIA has broken the resistance of 200 moving average and it could surprise by going upto 9800 level which means it could retrace 50% of the fall from 13050 to 6550. It is passing the stage of fourth primary wave of long bear market and shall move towards the fifth wave of primary movement after the upward correction is completed. 1996 level of 5400 shows the strong support for DJIA. Somehow, 6550 stands as a strong support. Medium term target is at 7550. Short term target is achieving nearly at 9800. Sell is recommended for DJIA. Straits Times Index (STI) Current Level 2710 Bottom 1450 Support 1900 Resistance 2830 STI moved up from the bottom of 1456 to 2700 where it broke the resistance of 1900 and 200 moving average. So STI level of 1910 become the strong support for STI and 65%

correction of entire upward rally. It is still slightly away from our May’09 article which states the target of 2830. It seems that STI made a peak at 2700 as 5 waves Dow Theory is completed. Sell is recommended at current level with support at around 1910 level. Hang Sang Index (HSI) Current Level 22250 Bottom 11300 Support 15600 Resistance 20800 HSI moved up from the bottom of 11350 to 22250 where it has achieved our May’09 article which states 20800 levels. So index level of 15600, become the strong support for HSI and 1/2 correction of entire upward rally. Sell is recommended at current level with support at around 15600 levels. BSE Sensex (BSE) Current Level 17400 Bottom 8150 Support 12200 Resistance 17500 BSE moved up from the bottom of 8150 to 17400 where it broke the resistance of 200 moving average and the resistance of 12600 levels. It also touched our target of 15450 twice since 5th June. The target was stated in our article of May’09. There is also gap formed at 12200 and 11400 levels. So, index level from 11100 to 12200, become the strong support for BSE and 50 to 65 % correction of the entire rally. There is also monthly gap up opening from 11400 level as on 4th May’09 and a big 17.50% gap up opening on 18th May’09. The gap is at 12200 level, which shall fill at the time of correction. Sell is recommended at current level with support at around 11400 levels. Fundamentally speaking, emerging markets (EMs) reached the PE ratio of 8 during the bottom of the bear fall which is an indicator of over pessimism in the equity markets. The pessimism gripped the markets all over the world with high negative bias which was all of a sudden. Commodity and equity markets fell sharply throughout 2008. Five year BULL market got heavy correction within the span of 24 months. EMs fell as much as 65% from the top of October’ 07 to January’ 08 depending upon country to country. They bottomed out between October and November 2008. Ultimately DJIA, European markets and EMs finished their respective downfall by mid March’09. Stock markets of Brazil, Taiwan and China bottomed out earlier than other world equity markets. The PE ratio disparity between DJIA and EMs has narrowed down rather the later has premium of 15% over DJIA. The projection of EPS for DJIA by the end of 2009 is approximately US$ 540 which discounted at PE ratio of 10 would result in 5400 level. Historical data shows that during the bear markets in USA which prevailed during the twentieth century (Crash of 1929 and Crash of 1970s which longed for more than 15 years), PE ratio swung between 8 and 14. The median of PE ratio for the century remained at 15. Looking at the historical PE ratios during gloomy scenario, it can be said that DJIA can touch for a short

while the level of 4800 which is 9 PE multiple. Such low PE ratios could occur due to irrational behaviour of stock markets which do happen occasionally at the times of over pessimism. So recommendation on DJIA is bearish.

The standard fair valuation of the equity markets should have average PE ratio between 12 and 14. Current levels of the EMs represent PE ratio between 15 and 17 which could be an opportunity to sell in equities with medium term aim to buy it later. During the correction period of bear market where the current upward rally is witnessing one, it should be an opportunity to sell. The pace at which EMs have performed is not healthy because it is driven due to sudden excess liquidity in the world markets which will ease down as the time will pass. Stimulus package by various leading countries and cash for clunkers in USA are like steroids medicine which will have temporary effect but very bad long term side effects. Deficit in USA will rise substantially by giving tax breaks, stimulus package to financial sector, cash for clunkers in automobile industry and such other packages to boost economy. Growth in the economy should take place naturally with good investment confidence. Such booster packages by the governments cannot last long the growth as it is one time dosage and not ongoing process like the business climate. So eventually markets would move downwards as soon as the booster effect is over. Nearly double return from the bottom within two quarters of a year is bubbly. Supernatural reward has to succumb to the law of gravity, hence fall in EMs as well as all other markets. The percentage jump of all EMs is nearly 90 to 110% around the world so BSE Sensex is no exception. Since 1st week of June’09, it had touched 15500 and since then it made a new peak of 17400 during mid-October month. As the fall should set in anytime in the near future, 200 moving average should stand as strong long term support for the EMs. BSE Sensex was the only exception in the world where it gave 100% return in 3 months whereas other EMs were under performing at the same time. During the mid month of August’09, majority of the EMs achieved their targets as stated in our March and May articles as well as they gave 100% returns. As on today BSE Sensex and all other major EMs are giving same returns and major fall should set in anytime from now. The story in 2009 to 2010 should play out between PE of 12 to 17 where level of 12 PE should hold as strong support. Time correction is also necessary along with price correction for 5 year

big bull market from 2003 to 2007 which should get over by 1st quarter of 2010. We are into middle of big upward commodity boom cycle where inflation shall reach such heights that the citizens of respective countries would disgruntle. USA and European countries could face major deterioration in their currencies and reserves where crisis like situation can arise. Gold is a fiat currency so it has to go only up. By Ankur Sharda

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