I must be wrong only. But generally, a crisis does not hit when everyone out there is looking for it. It generally has an element of surprise, no?

May 2014, Modi could do no wrong. The stock markets were supposed to zoom and Rupee was to touch 55 and 50. Cut to Jan 2016, and Modi can do nothing right and stock markets are to fall another 10-20%.

I must be wrong only. The world was supposed to have been coming to an end in 1998, when Russia defaulted and LTCM broke. And in 1997, during the Asian Crisis. In 2007-08, when USDJPY and USDCHF broke those really low levels and lots of people got caught in those exotic currency option structures that were not supposed to go wrong. The world has been continuously coming to an end since the Global Financial Crisis hit and broke Bear Sterns in 2008.

I must be wrong only.

Is it not a possibility that China (along with USA and Europe) allowed and absorbed the Euro fall through 2014-15 in order to let Europe stabilise a bit by allowing exports to do well? And now the Europeans will allow the Euro to strengthen a bit against the Yuan, to give breathing space to China, as the Chinese want? Not possible, no, in a “currency wars” scenario?

Euro was supposed to be at 1.05 at least by now, no? More likely Parity, if not 0.95. We are looking for 1.20-25 by September 2016. We must be wrong only.

In 2008, crude was 150, the “Peak Oil Crisis” had pulverised us, the world’s oil wells were drying up and crude was sure to go to 200. Anyone still holding Crude Longs from back then? Should I not go Short Crude here? 30 is a good level to sell Crude, no? Supposed to fall another 50%.

Then why am I not doing these trades? I must be wrong only.

What to do?

Bloomberg has ranked us #1 worldwide for our Dec-2015 Dollar-Rupee forecast.

26-Apr-16
Dow Jones @ 17990

Could we be on the cusp of a gigantic bull run in the Dow Jones?  If history repeats itself, the chances would be high.

In the last 115 years, there have been two periods (1906-1921 and 1966-1982) of multi-year sideways consolidation resulting in a huge breakout on the upside, producing two of the three best performing bull markets since 1900.

In this report we look at the possibility of a similar multi-year bull market that could begin as soon as in the next 2-4 months.

The really BIG picture

In our Apr ‘16 quarterly Rupee forecast, we wrote, “The last 115 years history of Dow Jones shows two long term sideways consolidation of 15-16 years each (1906-21 and 1966-82), later giving birth to multi-year bull markets. These are shown in the blue boxes in the chart below. A projection of the same duration on the ongoing sideways consolidation since the Y2K top in 2000 gives us the current year 2016 as a possible starting point of a huge secular bull market, possibly from August.

This view is unlikely to be shared by most people at this time. But, ongoing below-the-radar technological innovations could come together to create a positive surprise. We would assign this possibility a probability of at least 55-60%. It should not be ignored.”

The first consolidation (Jan 1906 – Aug 1921) took 188 months and the second consolidation took 199 months. The current phase that started from Dec 1999 will be 199 months old in June 2016. Allowing for some margin of error, July-August 2016 could be the starting of the next epochal, multi-year bull run.

As mentioned, this might sound improbable to most people given the current preoccupation with low global growth, QE and negative interest rates. Similar despondency might have ruled the popular spirit in the 1920s and in the 1980s (please see the last page of this report). Yet, from the darkest moments have emerged the most brilliant bull markets, as seen above.

Years of prior hard work in solar energy, in electric cars, robotics, genetics, e-commerce and many other fields could be coming to fruition in the coming years. If the Dow were to indeed move up as suggested by the chart above, it could target about 12.00-12.50 on the Log scale. That would translate to a nominal value of 162,750 on the DJIA, compared to the current level 17977, or returns of 9X in the next 10-15 years. For now, we can well target 22500 over the next 12 months.

We are approaching the end of April. People might be preparing to “Sell in May and go away”. That could well lead to a very near term dip. But, we would suggest that people should come back by June-July and start looking around for buying opportunities to participate in what might be the biggest bull market in our life times.

Looking at the above chart, the question to ask is, “Is this the best time to go Short on Human Ingenuity, or would it be better to go Long?” We would like to approach the market from the Long side. The following pages show a few more technical studies to back up our bullishness.

Inflation adjusted price comparison

The inflation adjusted price (“Real”) of the S&P 500 opens up the hidden strength or weakness, not obvious from the normal price, both of which are shown on a Log scale in the chart below.  

When the Nominal S&P hit a 13 year low in 1921, it was well within the 15-year old (1906-1921) sideways range boundaries but the Real S&P shows it to be a 42-year low, markedly different from the previous lows and a prime candidate for a major bottom. In 1982, the low registered by Nominal S&P was actually closer to the upper end of the 16-year old (1966-1982) sideways range (marked by pink rectangle) but once again, the Real S&P shows it to be the lowest point in 28 years.

Similarly, in 2009, the Nominal S&P hit a 12-year low, but it was a 14-year low for the Real S&P. This can be taken as a major bottom despite the period of 1999-2009 being much shorter compared to the earlier two instances. When seen through the lens of Inflation Adjusted Price, in all the three instances, a multi-decade low has been registered followed by a higher high giving the initial signal of the next bull market.

As the S&P now trades above the 2007 high, there is a possibility that the next major bull run has already started in 2009 and the next up leg can unfold in 2016.

Irregular Flat formations

In Elliott Waves, an Irregular Flat consists of a higher high (marked by red B) and a lower low (marked by red C).

Since 1900 there have been three significant instances of this pattern formation, shown in the chart alongside, all of which coincide with the sideways consolidations shown in the earlier page. The last two Irregular Flats (in the 1920s and 1970s) resulted in multi-year rallies and the current instance can also resolve on the upside.

Fractal Comparison

A time comparison of the three periods highlights a strong similarity till about the 143rd month at least. Thereafter, the paths diverge after about the 166^th month (14^th year).

The significant difference between the current period and the earlier two periods is that QE has enabled the DJIA to move up over the last three years. Perhaps QE has enabled some amount of wealth preservation, even if in the hands of a few? Could that provide the essential fuel for the next bull run, if those who have the wealth invest it in the commercialization of the emerging technologies.

Socio-economic events

Although we have no delusions about ourselves being historians or sociological experts, we have tried to paint below a broad picture of the things that were happening in the world in the consolidation periods seen in the charts earlier. Was there any commonality that gave rise to the bull markets that took shape afterwards?

The period of 1906-1921 was a period of political upheavals and technological progress. China saw the end of monarchy and its first republic. Russia too saw a similar end of monarchy with the Bolshevik revolution led by Lenin. World War I came with devastating results for Europe, setting up the foundations for the next world war.

In the USA, the Ford Model-T car and the Texas oil boom revolutionized transportation, and assembly-line based mass production revolutionized industry. The country also benefited from its mercantilist policies in the initial part of WW-I and later from the war reparations from Germany, the leader of the Central Powers countries that were defeated in the world war. The ground was ripe for a bull run to take place.

The period of 1966-82 was an age of global anti-establishment and free thinking. Wars, strife and technological progress again ran parallel to each other. Universities across USA erupted in anti-war protests against Nixon’s ill-fated Vietnam War. It was a time of hippies and flower-power, free-thinking and drugs and, of course, the gloriously anti-establishment rock music. While the two global superpowers USA and Russia were engaged in a cold war, Deng Xiaoping became Chairman in China and paved the way for the economic progress that was to come in the next decade. The Middle-East saw the Iranian revolution and Saudi Arabia engineered the first oil price shock.

One of the most significant events economically was the abandonment of the Dollar-Gold peg, giving rise to the creation of fiat currencies and the free float currency markets. The cold-war fuelled a lot of technological research and progress sponsored by the Pentagon-CIA. All these together gave rise to the bull run that followed.

Interestingly, the seeds of future revolutions like the internet, genetics and robotics were all sown at that time.

The current period 1999-2016 has also seen global strife (Jihadist terrorism and America’s disastrous engagements in the Gulf and Afghanistan) alongside tremendous technological progress.

Despite periodic upheavals, Europe has come closer internally after the introduction of the Euro in 1998. China has emerged as a new economic superpower. The global economic paradigm has changed after great financial meltdown of 2008 forcing global central banks to try to prevent prolonged recessions with unabashed Keynesian policies. This period has also seen the coming of age of the Internet, of e-commerce, solar energy and medical breakthroughs such as the taming of cancer. And the world is now agog with the promise of new revolutions such as electrical cars, robotics, 3D-printing and blockchain powered bitcoin money.

Each of the three periods above can be seen as fertile ages for human innovation that eventually expressed as large bull markets. We repeat, the question to ask is, “Is this the best time to go Short on Human Ingenuity, or would it be better to go Long?”

02-May-16 / Brent 45.91 / USDINR 66.44

EXECUTIVE SUMMARY:

Contrary to the popular notion, data shows that Rupee & Brent Crude move mostly in a similar direction and not opposite to each other. This means, a fall in Brent does not lead to Rupee appreciation. Rather, the Rupee tends to gain when the Brent rises. The logic is probably that a rise in Brent is symptomatic of an increase in economic activity, which fuels growth and leads to a rise in Equity markets. That, in turn, attracts FII investments, leading to Rupee strength in the process.

This study highlights the counter-intuitive but highly correlated movement of Brent and the Rupee.

Note: In all the charts, Dollar-Rupee is shown in an inverse scale, on the right hand side of the chart.

The first chart shows the period from 2011 till date. As can be seen, there is a broad positive correlation between the fall in Brent over the years and the weakness in the Rupee over this period. The rest of the charts that follow show the numbered periods in greater detail, except for the period 2, when Brent and Rupee moved in opposite directions.

1: Jan ’11–May ’13 

In this 16-month period, multiple instances of movement in the same direction are seen (marked by arrows).

Major tops and bottoms also took place almost at the same time.

4. Jan ’16–Apr ’16

Initially, Brent and Rupee weakened along with each other. Later, from February, Brent gained from 33 to 47, while the Rupee gained from 68.75 to 66.00.

The directional synchronicity of the last few months is clearly visible on this chart also. The bottom in Brent has been reflected in gains in the Rupee also as once again the movements of Rupee and Brent have been in the same direction.

CONCLUSION:

Over the last few years, global investment sentiment has tended to oscillate quite often with the price of Brent. An appreciation in the price of Brent triggers a risk-on approach, flooding all emerging markets including India with liquidity, making the Rupee strong against the Dollar.

This kind of uncommon counter-intuitive studies and insights are what make our analysis and forecasts a little more worthy of our discerning Clients.

02-Nov-16 / DJIA 17960

EXECUTIVE SUMMARY:

The US stock market generally remains unaffected by the presidential election in the long run, as evident from the chart below. Except for the tenure of George Bush Jr. (2001-09), all the presidential tenures have seen almost uninterrupted bull markets. Regarding the short to medium term impact, the table below indicates that the market generally tends to rise going into the election and performs even better after the election. History doesn’t show major disturbance due to the election and it remains to be seen if this impending election can trigger something different.

Chances are, even a Republican victory this time may not produce more than a knee-jerk reaction to the downside and the long term uptrend may sustain.

Dow Jones performance around US Presidential election: