QUANT SYSTEM OVERVIEW: INFLATION & MARKET TURN - 14.10.24

From the desk of Capt.D.Ganesh Raja                                                                      

DISCLAIMER

Please be informed that the author of this blog by Capt Ganesh Raja Dhanuskodi (Hereinafter called Capt Ganesh) is not a SEBI registered Research Analyst or Financial Advisor. Capt Ganesh writes this blog to express his views based of more than two decades of experience in capital markets and based on the Quant system which he has invented and he does not do this for “consideration” as per SEBI regulations, which means he does not receive economic benefit through it. Readers of this blog must seek advice from registered Investment Advisors / Research Analysts before taking any trading or investment decisions.

Capt Ganesh has been investing and trading actively since 2001, building trading models since 2013 and has invented an AI based intraday trading system, which has a pending patent approval.

Dear friends,

I will begin this article with warm greetings of Dussehra and Vijayadashami.  I would like

to highlight an interesting conversation, I had with a person from Sierra Leone working as a

carpenter in a shipyard, where I am at present for shipping related work. I was amazed by his keen understanding of geopolitical situation and when I questioned him about his own country he was well aware of the exploitation of the diamond mining business by vested interests and how people were deliberately pushed towards substance addiction for this. He said with a smile  that no worries since they will join up soon with BRICS currency to reduce dependency on US dollar. A conversation like could have been unimaginable 3 decades earlier. All this shows that people cannot be made fools for a long time in a connected world.

We will have a look at the happenings in US economy and then move on to our economy and

markets. The reason being some big events are happening there including the US presidential elections beginning in November 2024.

Let’s look at some recent happenings in US economy:

• Stubbornly high price increases in September showed the Federal Reserve's war on inflation isn't going as smoothly as it looked a few weeks ago.

• Economists saw the data as more a bump in the road than a serious revival of the inflation that disrupted the economy in the wake of the pandemic.

• Jobless claims also rose sharply last week, but the uptick was likely because of hurricanes and not a problem with the overall economy.

• Traders are still betting the Fed will reduce interest rates at future meetings.

  
  

Stubborn inflation and rising joblessness are the exact opposite of what the Fed wants as it attempts to bring the economy down from the feverish outburst of inflation that followed the pandemic in 2021.

In September, the Fed began trimming its benchmark interest rate, which influences borrowing costs on everything from credit cards to mortgages. At that time, officials said they expected to make further cuts in the coming months. Central bankers projected they'd make a 25 basis-point (bps) cut at each of the two remaining meetings. But will Fed officials rethink their rate-cut plans with inflation running hotter than expected? Several economists think not.

“The larger-than-anticipated gain in the September consumer price index doesn’t signal a reacceleration in inflation, nor will it deter the Federal Reserve from cutting interest rates by 25 bps at its November meeting," Ryan Sweet, Chief US Economist at Oxford Economics, wrote in a commentary. "The Fed needs to continue to normalize interest rates to keep the economy on the path toward a soft landing."

US consumer inflation expectations for the year ahead were unchanged at 3% in August 2024, the same as in July and June. Median year-ahead expected price changes increased by 0.1 percentage point to 3.6% for gas, by 0.2 percentage point to 7.3% for rent, and 0.4 percentage point to 8.0% for medical care, but declined by 0.3 percentage point to 4.4% for food and 1.3 percentage points to 5.9% for the cost of a college education. Median home price growth expectations increased to 3.1% from 3.0% in July. The five-year-ahead inflation expectations was also steady at 2.8%. On the other hand, median inflation expectations at the three-year horizon rebounded somewhat from the low July reading, increasing from 2.3% to 2.5%. Elsewhere, median one-year-ahead expected earnings growth increased to 2.9% from 2.7%, just above its 12-month trailing average of 2.8%. Source: Federal Reserve Bank of New York

In Trading Economics website there were more analytical tools which they have removed so I have to manage with the tools I have.  Combining the views of reputed economists for now and again what they said some time ago with the information above, it seems a bit contradictory about the rate cut cycle initiated by Fed. Please have a look at the inflation expectation chart, which is in the attachment, the red line is a critical inflation line and which is known as polarity principle in technical analysis parlance. So is the rate cut bit premature and would follow up rate cuts aggravate the inflation situation in US , albeit stoking a short term sharp rally in the world markets, time will tell.

So let is look at the DJ World index, which is at 641.66 This index has been rallying since 10.11.23, so the trend is in force for almost a year. It crossed a critical resistance of 578.69 unsuccessfully on 08.03.24 and dipped below and again successfully crossed it on 03.05.24. However, applying proprietary filters, the buy signal in this index was triggered on 06.09.24 at 604.71, which had a global sell off. So, if we had to have a price confirmation for this index it happened on 13.09.24 at 622.26. In daily chart it consolidated from 16.07.24 to 19.09.24.

Why am I discussing so much about this index? I have done this in the past too. Trying to look for clues of sustainability of the rally in the near term and possibility of a reversal in the intermediate timeframe.

China pledged on Saturday to "significantly increase" debt to revive its sputtering economy, but left investors guessing on the overall size of the stimulus package, a vital detail to gauge the longevity of its recent stock market rally.

These are all steps investors have been urging China to take as the world's second-largest economy loses momentum and struggles to overcome deflationary pressures and lift consumer confidence amid a sharp property market downturn.

Reuters reported last month that China plans to issue special sovereign bonds worth about 2 trillion yuan ($284.43 billion) this year as part of fresh fiscal stimulus.

Half of that would be used to help local governments tackle their debt problems, while the other half will subsidise purchases of home appliances and other goods as well as finance a monthly allowance of about 800 yuan, or $114, per child to all households with two or more children.

Difficult to say how this will pan out giving the opaque nature of figures emanating from China.

However, this might stoke up commodity prices. Let us have a look at S&P GSCI index, which closed at 559.64. The S&P GSCI®, a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The index consists of 24 commodities from all commodity sectors - energy products, industrial metals, agricultural products, livestock products and precious metals but its exposure to energy sector is much higher than other commodity price indices. I checked this index with Quant system filters and it seems probable that it might rally till 581 levels in the near term, which is a rally of 3.93%. MCX Crude has a close correlation to this index.

Brent crude after hitting lows $71.0 / barrel , rallied sharply amidst middle east tensions and presently at $77.45. I was negotiating for an oil contract between two parties and the deal did not go through. At that time, I ran my check when oil was hovering at its lower band and informed the buyer to lock in the price for long term contract, since there were indication of prices going up. Also due to La Nina effect, there is a high probability of colder winter in northern hemisphere , which might add to further price rise.

USD / INR: Last close – 84.06. It has been a gradual weakening spread over last two years in a narrow band but Rupee below 83.45 for several weeks is not very comforting but there is no indication in Quant for any kind of breakdown in near term.

I can see some challenging time ahead for central banks to play the crucial balancing role. One can say for sure that RBI has been really cautious in treading and holding on to interest rates.

Now we turn our attention to the domestic stock markets. The VIX indicator at 13 is in a listless zone with indications of falling further in near term.

The 10-year Government Security index has no indication of reversal, so we will leave it aside for now. The Reserve Bank of India's Monetary Policy Committee (MPC) on Wednesday (October 9, 2024) decided to keep the policy repo rate unchanged at 6.50% for the 10th consecutive time. The inflation expectations chart and structure is indicating there is a likelihood of it rallying higher.

There is a faction which believes RBI might cut interest rates in December 2024, but if we put together the above information of higher inflation expectations and crude prices, it seems unlikely RBI will be in any kind of hurry to do that.

Nifty turned down from 26178.75 on 27.09.24. Fibonacci clusters are between 25261 to 25975, and the recent high is very close to it. 5 wave rally from Covid lows on 03.04.20 to high of 08.10.21, it lasted for 554 days, which was alpha wave. The 3 wave a-b-c correction of the alpha wave, from 08.10.21 to 17.06.22 lasted for253 days.

If we project from the lows of 17.06.22, the recent market high of 26178.95 (I only consider weekly closing for my calculation) it translates to 833 days. Running various time cycle analysis, we can see that there was a intermediate high on 21.07.24 and there might a high on 29.11.24.

We will not take these dates as sacrosanct but review it as events and indicators unfold.

Doing a careful wave count it seems that market might rally to complete the wave count and might retest the top and even might scale higher by some margin.

I will continue on this synthesis little more with another post soon.

RETURNS TILL DATE SINCE 04.07.20 : 168.17.% (AS OF TUESDAY 26.07.24 CLOSING) 

LEVERAGE FOR EXISTING MOCK PORTFOLIO TRIGGERS: 1.65

SYSTEM EXIT DELEVERAGE: NIL

LEVERAGE FOR NEW MOCK PORTFOLIO TRIGGERS: NA

TOTAL LEVERAGE: 1.65

ASSET ALLOCATION PROFIT POTENTIAL FOR NEW PORTFOLIO TRIGGERS : NA

TIME PERIOD OF TRADES RECOMMENDED : 15 DAYS TO 3 MONTHS.