In the era of high voltage media blitz, it always pays to take information in the public domain with a dose of salt, if not chilli powder. Over the past two months, the favourite of the media was trying to predict the monsoon with the occasional sprinkling of selective coverage of the scams. Interestingly, the Sahara scam barely found a mention except on the day of the Supreme Court verdict. In the past, we avoided attempting to predict a drought and have consistently held that it is too early to call a drought (at least in AP) for the simple reason that historically, there were a number of occasions when there were floods in September - October. This does not mean that merely because AP has received its fair share of rains, the problems are over. The State benefits substantially only with abundant rains in Maharashtra and Karnataka.
Therefore, in times such as these, it is best to attempt to gain insights through more objective indicators (i.e.relatively speaking) and arrive at our own conclusions. Personal experience indicates that a detailed look at the chart patterns is useful. This short-post attempts to outline a few chart patterns that will have a bearing on the future.
A look at the US indices is instructive for a number of reasons. US is the largest economy, despite all the rhetoric about the demise of the dollar, that is easier said than done. A more important reason is that in the era of reverse globalisation, the major beneficiaries are like to be USA and Europe (after the present crisis drives down wages over the next few years). We say next few years as the charts seem to indicate that the markets may be heading into a perfect storm. Complacency is at historically high levels. Despite all the rhetoric of the free markets, hoping that the US Federal Reserve expands the supply of money is the hope on which the markets survive on a daily basis. The results of mining companies clearly indicates that the world economy may have topped. China seems to be hurtling downwards while India has no clue about what is happening. Brazil lies between the two, while Russia is not likely to well, especially when industrial metals and oil decline while food grains rise.
The chart below of the S&P 500 index in US indicates that the markets may be on a verge of a major down move. A look at the bottom part of the chart below indicates that while the S&P index has maintained a semblance of increase, the decline in the internal strength (in this case indicated by Relative Strength indicator) matches that of the decline between 2006-2007 that preceded the crisis of 2008
Think that is a statement that is sensationalism or filled with hyperbole? The chart below compares the volumes of the S&P 500 with price movement. Volumes have steadily declined, especially when the market have rallied, indicative of the lack of conviction among buyers? Or does it portend something even more ominous? Like the death of the 'equity cult' that was peddled to the middle classes as the road to riches? The short answer is that nobody knows. Little wonder that Keynes observed that 'the markets can remain irrational for longer than you can remain solvent' (sic).
Over a longer horizon, the chart below of the Dow Jones Transportation Average (monthly) from 1990 the present should be a cause for greater concern. It indicates that the rally is not only running out of steam but is also likely to decline substantially (if the charts are any guide). Since the chart is monthly, the results are likely to play out over a period of months rather than a few weeks. If our fears turn out to be correct, the consequences for the global economy will be disastrous and will be felt for the next few years.
Therefore, it pays to be cautious.
