13 February 2011

Nifty Vs S&P 500

As discussed earlier in Nifty's Decoupling I was expecting Nifty Vs S&P 500 ratio to first slide to 50 week moving average and then to 200 week moving average. It looks like I am going to get more than I bargained for!



In the chart above you can see the ratio has almost from almost 5.4 to 4 a drop of 25% which is kind of huge. Whatever happened to the darling of emerging market consumer driven growth story. One thing is as true as the sunshine, that nothing can ever escape mean reversion, equities for that matter can never!

So what happened here. Was the valuation getting too far ahead, did the scams and scandals broke the faith, is the Inflation really going to dent the earnings, are we in for a series of rate hike due to inflation worries or there is some bad news going to come up, already priced in. Whatever be the reason, its for sure that emerging markets are really going to have a tough time now that developed markets are surrounded by extreme bullish sentiments. Money is now flowing back home! My contrarian senses are telling me that very soon the US and European markets will also see a turn of tide, and if that happens emerging markets will have no place to hide.

Coming back to the chart, a correction of around 10% to 15% in S&P500 will take it to around 1200, which will correspond to 4800 in Nifty as per long term ratio. I am well prepared to see levels below 5000 in as early as March.

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