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Sol Palha


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Views on India, Precious Metals and Oil

By Sol Palha      Printer Friendly Version Bookmark and Share
Feb 16 2010 2:53PM

www.tacticalinvestor.com

India

We are just going to briefly touch this topic today and if time permits spend more time on it in future updates. The Indian Government announced that the economy expanded roughly at 7.2% for this fiscal year; like china this is an astounding growth rate and on the surface would justify the bullishness surrounding its stock market.  However, as always there is more to the story than meets the eye.

First of all, the Indian government always has a problem in managing its budget; even in good times they manage to run a budget deficit. Another problem is that you have budget deficits on two fronts one from the central government and one from the provincial governments and their total budget deficit could run well over 12% of GDP.  Such a high budget deficit puts them in the league with the PIIGS (Portugal, Ireland, Italy, Greece and Spain).

India like most nations decided to stimulate their economy, but they decided to embark on monetary and fiscal stimulation at the same time. They lowered repo rates to 4.75%, but inflation is running at roughly 11% so what you have is a negative rate of interest here.

It held its lending rate, or the repo rate , unchanged at 4.75 percent and its reverse repo rate , at which it absorbs surplus cash from banks, unchanged at 3.25 percent.

Despite increasing inflationary pressures, the central bank has been under pressure from senior government officials to hold off from raising its policy rates, which they argue would undermine the economic recovery. Full story

When India’s deficits get too high it relies on foreign financing unlike China and so while the growth rate is high, investors might not mind financing these deficits, but a slowdown could cause them to flee and produce a similar crisis as the one that is currently plaguing Greece.

India is also suffering from a drought and food prices are rising at roughly 15-18% a year.  The best thing to do now would be for the governments to cut back seriously on public spending but the congress party in command has a history of spending heavily on public projects, and so we cannot expect any change here.
A look at some of the top stocks indicates that they are pulling back or building up patterns that suggest all is not well. Our advice if you are heavily invested in the Indian and or Chinese markets is to lighten up or completely get out until the situation mellows out. The current trend is very dangerous and inflationary forces are already manifesting themselves strongly India; a slowdown in economic growth could lead to rapid breakdown in the stock markets.   The BSE SENSEX Index has already put in a rolling top formation (this is what took place in the Dow); a break below 15,500 for 5-7 days in a row, could lead to a test of the 12k-13k ranges. There are many good long term plays in India, some of which are IBN, INFY, RDY, etc., but right now they are all still trading at lofty levels and so a strong pull back will provide for much better entry points.  It’s time to be cautious; as they say it’s better to be safe than sorry.

Oil

Security is the chief enemy of mortals.

William Shakespeare, 1564-1616, British Poet, Playwright, Actor

Oil 2010.jpg

Oil recently mounted a strong short term rally and traded as high as 77 but pulled back just as fast. This inability to hold above 74 suggests that it is still in a consolidative/corrective phase; unless it trades above 74 on a weekly basis the odds favour a pull back to the 63-66 ranges.

The intermediate pattern is still bullish and suggests that by summer oil could be trading significantly higher. The first sign of much higher prices to come will be for oil to trade past 78 for 3 days in a row or close above 84 on a weekly basis. Thus going into the summer season we could be looking at higher prices and a depressed stock market.

As long as oil remains below 74, the trend will remain negative. Currently, we have weekly and daily sell signals in effect. The daily signal is moving closer to the buy zone and a new buy signal should lead to a rapid upward move in a relatively short period of time; if this occurs we will definitely issue a long trade in our VIP futures service. However, as of yet we have no buy, so do not jump into this market, unless you are opening up long term positions. A weekly buy signal would be a very good early indication that oil is getting ready to trade well past the 93-95 ranges and possibly past 100.00

Finally oil has been trading in a channel formation that ranges from 66 to 84 for almost 8 months; the longer the channel the more explosive the move. The only problem is that channel formations do not give clues as to which direction the move is going to occur. For that we need to use other tools and that’s where multi time frame analysis, daily and weekly signals, etc., come into play.  Preliminary indications suggest that the next big move is going to occur towards the upside. A daily buy signal would give an early warning of this break out, while weekly buy would indicate that the breakout is gathering steam and that oil is getting ready to challenge the 90 plus ranges. From a long term perspective any price below 65 is great play to open up new positions in oil related stocks.

The energy sector much like the precious metal’s sector is consolidating right now, though the current pattern (and this could change) suggests that oil will lead the way up initially. Higher energy prices will indicate that inflationary forces are gathering even more momentum and Gold thrives under such conditions. Thus if oil trades to new highs, it will serve as an early warning sign that Gold is ready to embark on its next upward phase; a test of the 1500-1700 ranges.

There's no security on this earth, only opportunity.

Douglas Macarthur, 1880-1964, American Army General in WW II

Sol Palha

 

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Sol is a self-taught market guru, having read widely conventional and non-conventional texts on all aspects of technical analysis and market timing.