Beyond Bull Runs: Understanding Market Mean Levels

Investing in the stock market can often feel like riding a wave of optimism, especially when prices keep soaring to new highs. Investors usually assume that this upward momentum will last indefinitely, much like stretching a rubber band to its limits. However, the rubber band follows a straightforward rule - the more it's stretched, the greater the strain it bears until it eventually snaps back to its original state. Similarly, extended periods of bullish markets eventually give way to corrections as prices revert to their mean levels over time.

But how can we pinpoint the mean levels in markets? One effective method is utilizing moving averages. When employing moving averages, we can say that the index is in a bullish trend until its spot closes below the moving average line. We can observe a notable pattern in the Nifty 50 chart below, which spans a weekly timeframe and includes a plotted 100 Weekly Moving Average line. Following each bull run, the index retraces back to its moving average line before initiating another upward trend. This observation underscores the significance of moving averages in determining market trends and mean levels.

If we dive deeper, we might wonder how long a bull market lasts, how to know when it ends, and what are the returns following a bull run. The chart below showcases the continuous span of days the Nifty 50 remained above its 100-day moving average. Remarkably, between 2000 and 2024, the Nifty 50 has sustained a streak of closing above its 100-day moving average for more than 100 consecutive days on 18 occasions.

The table below displays the forward returns of the Nifty 50 index after it closes below its 100-DMA. Over the period from 1990 to 2024, there were 23 occasions where the index sustained a bullish trend for more than 100 consecutive days.

On average, these bull runs yielded returns of approximately 34%. It's worth noting that the 1-month forward returns following the end of these bullish streaks tend to be negative, averaging at -1%. However, we can observe positive returns on 3-month and 6-month forward timelines, with average returns of 2% and 4% respectively.

Nifty 50 index has been on a bullish streak for more than 110 consecutive days since November 15, 2023. This aligns with historical trends of prolonged bullish sentiment. However, investors need to exercise caution and avoid assuming that the bullish phase will persist indefinitely. It's prudent for investors to regularly review and churn their portfolios to mitigate the potential negative impacts of a shift to a bearish cycle, which could occur unexpectedly.

Technical Outlook

Nifty showed a notable upswing of 1.23% during the week and concluded the session at 22,420.

The decline in India's VIX (10.92), a measure of market volatility, enhanced the bulls resulting in a positive market outlook.

Technically, Nifty sustains its position above the 20 and 50 Simple Moving Averages (SMA) with the Relative Strength Index (RSI) holding above 52 levels. The support level has shifted higher towards 22,150 followed by 22,100 while resistance stands around the previous all-time high of 22,751.

Along with large and mid-caps, the small-caps have also participated in this bull rally, strengthening the market breadth. The ongoing Q4 earnings results may spur more stock-specific actions in the coming sessions. The Global markets remained stable providing further support to the domestic market.

Indian Rupee: Aiming to be World’s Alternate Reserve Currency

The Indian Rupee (INR) has fallen sharply against the US Dollar (USD) in the last one month. This has resulted in the purchasing power of the INR in the international market diminishing and has increased import costs significantly. India, which is heavily dependent on oil imports, suffers severely due to the devaluation of the INR.

In a proactive response to this challenging situation, in last July India had signed the pact with UAE to pay oil bill in INR. This is a roundabout arrangement. India had also executed INR trades in Russian oil imports. Currently, India imports crude oil from 39 countries, thus a wide scope for such arrangement with other countries.

With the latest news coming, talks are going on for RBI takings measures to make INR acceptable in the Thailand, an increased overseas holiday destination for Indians.

RBI had put in place the mechanism for rupee trade settlement with eighteen countries by allowing banks from these countries to open Special Vostro Rupee Accounts (SVRAs) for settling payments.

All these steps of using INR as a payment mechanism instead of paying in foreign currency (USD in this case) leads towards the Internationalization of INR. Once this process is successfully implemented, it will provide following benefits to investors (both local and global) in a longer term:

- Reduction in the exchange rate volatility and currency appreciation
- Increase in foreign capital inflows in the economy due to reduction in currency fluctuation risk, given that most of global businesses want to set up the shop in India and investors want to bet on the opportunity available
- Reduce import cost and thereby narrow current account deficit and strengthen countries balance sheet
- Benefit India with enhanced geo-political influence on account of strengthened economic ties with other countries to be developed from bilateral trade agreements
- Reduce the pressure on RBI with requirement of maintaining high USD reserves (an all-time high of $645.6 billion as of March 29)

One of the major reasons for America being a super power in the world is its Rock-solid currency, which accounts more than half of all global Central Banks’ foreign currency reserves. Most of the global trade takes place in USD. It gives USA an ease to print more money and facilitates to take more debt from other countries.

Currently, India is fastest growing major developing economy in the world. Very soon it is expected to be the third largest economy. Global sentiments are bullish on the Indian economy. JP Morgan and Bloomberg has also recently added India in their Global Emerging Market Bond Index. In this robust backdrop, it is a promising case to aim for making INR an alternative reserve currency. The incremental steps taken by the Government of India (GoI) and the Reserve Bank of India (RBI) to promote global acceptance of INR are in the right direction and commendable.

The internationalization of the INR will not only save transaction costs on foreign trades but also directly yield dividends for the Indian financial market. Capital flows in the debt market and equity market will surge as INR becomes a stronger currency. Liquidity and investor faith in the market will improve.

Additionally, the stable and solid INR will increase purchasing power for Indians and promote the economic well-being as well as better returns for global investors. Thus, internationalization of INR ensures win-win situation for India as well as the global economy.

Technical Outlook

The Indian market grappled with heightened volatility last week due to escalating geopolitical tensions in the Middle East. The Nifty corrected by 1.65% over the week, settling at 22,147. Companies have begun to declare their Q4 results leading to expectations of significant market oscillations.

The India VIX, a key volatility indicator, surged by approximately 16%—its most significant weekly gain this calendar year. Foreign Portfolio Investors (FPIs) continued to offload equities. The Nifty remains below its critical 50-day moving average (DMA) indicating weaker market sentiment across various sectors, with Nifty IT dropping by 4.7% last week.

Immediate support is anticipated at around 21,800, while resistance is expected at 22,400. Until the Index surpasses the 22,400 mark, a "sell on rise" strategy is recommended for next week.

Golden Opportunity for Mining Companies

Whenever prices of a commodity rise we often focus on the ill effects it will lead to. For example oil prices. If the prices shoot up then as consumers we worry about how much we will have to shell extra on our next visit to the petrol pump. However, what is detrimental to us as consumers can become profitable too as investors.

Why can’t we think of benefitting from rising prices by participating in that trend as investors?

Let me explain. I wrote to you about the rally in Gold prices more than a month ago. Now gold has rallied to all-time highs recently. Consumers who were planning to buy gold are worried as they will have to shell out more money at the jewelers' shop. But if you are an investor then you won’t be worried.

You could have simply invested in gold and benefitted from rising prices. But there is yet another way in which you can make potentially more money than you would by investing in gold.

Just like oil exploration companies benefit from rising oil prices… gold mining companies too benefit from rising gold prices. Let us dive deeper and see how gold miners make money from the rising prices of precious metals. Here are 5 reasons why they make more money than a gold investor.

1.Increased profit margins:
Rising metal prices incentivize mining companies to ramp up production to capitalize on higher selling prices. Further, as the operational leverage comes into play, the cost of extracting these metals remains relatively stable. As production increases, fixed costs are spread over a larger volume of output, leading to lower average production cost per unit. This means that for every additional tonne of metal extracted, the cost per tonne decreases, leading to higher profit margins.

2.Higher Reserve Valuation:
When the prices of precious metals surge, it’s like finding a treasure chest for mining companies. They own a lot of these metals in reserve, and when their value increases, the company’s wealth also increases. The higher valuation of reserves can provide a safety net during economic downturns.

3.Increased Investment Activities:
Rising metal prices often encourage mining companies to invest in exploration and development activities. With increased revenues, companies can afford to invest in advanced technologies, explore new mining sites, or expand existing operations.

4.Mergers and acquisitions:
Mining companies may pursue mergers or acquisitions to improve their competitive standing in the industry while also consolidating their expertise. By obtaining a notable stake in smaller competitors and merging with complementary businesses, these companies can broaden their asset portfolio, capture a substantial market share, and achieve cost synergies.

5.Reduction in Debt :
Mining is a capital-intensive business. Mining companies have to invest heavily in acquiring and operating mines. All of this investment doesn’t come through equity. A lot of it comes through debt too. Rising gold prices not only help to improve short-term profit margins but also lead to reduction in debt which is beneficial over the long term.

Gold and silver have been the talk of the town in recent weeks. Last month, I highlighted several reasons why including precious metals such as gold and silver in your investment plan is crucial, be it to hedge the portfolio or for earning turbocharged returns.

However, considering the above points, let’s not forget the unsung heroes behind the scenes: Gold and Silver Mining Companies. So, while gold and silver outperform, it’s the miners who truly strike gold in this lucrative market landscape.

Technical Outlook

Nifty ended the week on a strong note, closing at 22,514 with a gain of 0.84%. Meanwhile, the Nifty 500 also soared by 2.27%, showcasing the collective strengthening of mid and small-caps. The decline in India's VIX (11.34) a measure of market volatility, enhanced the bulls resulting in a positive market outlook.

Across the sectors supported the rally while Nifty Metal and PSU Bank remain top performers.

Technically, Nifty maintains its position above the 20 Simple Moving Averages (SMA) with the Relative Strength Index (RSI) holding 60 levels.

Technically, a cup with handle pattern appears in the daily timeframe implying a bullish setup. The Fibonacci retracement indicates solid support around the 22,270 followed by 22,200 levels. As long as this pivotal threshold remains unviolated the bullish trend in the index remains intact.

Despite the weak global cues the domestic market outperformed but this raises a minor cautiousness in the coming days.