07 May 2011

Nifty : Crude way?

We all know Crude Oil Prices are very much a guide to where Indian Markets are headed. The conventional wisdom says that higher crude prices are bad for commodity importers like India and China. But this is not always the case and we all now know that both these prices behave in all sorts of correlation.

Ideally I believe in a typical economic cycle :
1. Both go up together (coming out to recession, easy money injected, all markets go higher)
2. Next price of crude go higher which pulls Nifty lower (concerns of Inflation and threat to growth due to it, while money from equities shift to commodities)
3. Then we see Nifty go higher because crude is going lower (concerns of demand slowdown pulls commodities lower, relief rally exhibited by equities)
4. Finally both go lower together (realization that growth has gone "for ever", there is wealth destruction, all markets slide)

The chart above show Nifty and Crude Oil from April to September 2008. I have marked the four phases in the chart. Though this pattern will not always be found, this small duration speaks a lot in terms of how price of crude governs Nifty. These were the times when every small movement of crude was tracked by Nifty traders and it looked like the only aspect that matters. In a larger time frames as well, I expect this kind of relationship to exist.

The idea of this post is to identify the phase we are in currently. The above chart shows the YTD comparison. We see a fall in Nifty from start of Jan to mid Feb while crude is range bound. Then suddenly there is a surge in both. Nifty has corrected since early April highs and looks like crude has just started that correction, with a 10% correction in a single day.

So are we in Phase I, when Nifty and crude rally and corrections are together with a small lag? Phase 3, when falling crude will provide impetus to equities? Or, Phase 4, when all assets will come tumbling down together?

The least likely possibility is 4, for it we need a major systemic breakdown in action (something like Lehmann collapse?). Though I believe the system had always been broke, we still do not have the price action confirmation.

Next likely Phase for me would be 1, when we see Nifty and crude rising and falling together. But the Nifty has been falling since Nov last year and crude has made a top as recently as May.

Most likely scenario is we being in Phase 3, when a correction in crude will give much needed relief to bullish traders. The equities are near a support zone of 5300-5500 and commodities are falling, rate hike has been done with, mood is extremely sour and analysts on TV predicting 5000, looks like we are well in track to go 6000. Or are we in Phase 4 :P !!


Kapil said...

Unfortunately my friend, you are in the business of guessing about people who are guessing. Ever heard of the term 'Peal Oil' ? Or did you notice the growth of 'CNG' vehicles in India?
Perhaps its not the price of crude oil that is going up, but the value of 'most' of the world currency that is going down.
Well I am no expert but FRANKLY SPEAKING, I don't see anyone is at making guesses. So save some time and buy some gold.

Tarique Anwar said...

Oh, an architect with interest in energy efficiency! No wonder you are fond of the term 'peak oil', If am I not wrong, it says that by 2050 the world will be out of oil and in case we don't have people like you, the world will literally come to a halt?

I am particularly fond of architect, can't say whether due to their ignorance or their ability to link anything with everything. They live in their fantasy land and expect the world to be what they believe.

The only thing on which I agree with you is the currencies are losing their value, how do you relate the increase of CNG vehicles with 'peak oil' though!?

We are in that period where threat of inflation and currency collapse is actually governing the investment thesis of the world. Wait when all these are proved incorrect and then my friend it will be difficult for you to find buyers to the gold you own. I have a better suggestion for you to save time... do not post comments here !

manu said...

hi anwar..amazing post..
we r n phase 1..

we r yes man to uncle sam..till he prints dollar we r safe..

dont worry abt economy as i also think world is going to end..long live uncle sam..

growth will have complication..we r growing fast..need to control population..

and finally do u wrk fr jp morgan

Tarique Anwar said...

hi manu, nice to see ur comments again! its amazing to see how on a daily basis, all markets equities and commodities go up and come down together. so surely as long as we have an option of QE(X) in the market we can see the "risk on" trades.. just wondering when this thing will reach an inflection point..

and yes finally.. i dont work for jpm !

Post a Comment