Chart-Watchers January 2020

Euphoria Phase Kicks In

Currency Bond

Commodity Equity

Sagar Doshi Ankit Narshana Abhishek Chinchalkar Research Analyst Research Analyst Research Analyst 91 (22) 4088 5757 Ext.6226 +91 (22) 4040 7596 +91 (22) 6141 2725 [email protected] [email protected] [email protected] Date: 9th January 2020

Edelweiss Professional Investor Research

ChartWatchers – “Part 2: Euphoria Phase Kicks in”

Sagar Doshi Research Analyst Part 1: Beginning of the Final Crest before the Tide Changes (September 2019) 91 (22) 4088 5757 Ext.6226 Part 2: Euphoria Phase Kicks in (January 2020) [email protected] Part 3: Final Call (April 2020) Ankit Narshana  In our previous ChartWatchers, we had shown why global markets rally between the time Research Analyst +91 (22) 4040 7596 US yield curve inverts and recession begins. Based on this, we had highlighted that world [email protected] markets could rally until 1HCY20.

Abhishek Chinchalkar  In line with our expectations, global markets have rallied sharply since 4QCY19. In fact, all Research Analyst +91 (22) 6141 2725 the 4 asset classes including bonds, currency, commodity and equity have started moving [email protected] higher.

 All asset classes moving higher is a classic sign of Euphoria, which we believe will continue in 1HCY20.

 The US yield curve has now shifted from inversion to steepening. Looking at the history,

when an inversion is soon followed by steepening, it is not a good sign as it is usually followed by a recession.

 Based on our analysis of the historic yield curve and the subsequent recessions, we still foresee the possibility of the US economy falling into a recession in 2HCY20.  Our time cycle analysis and central bank policy actions indicate that EMs are likely to

outperform DMs in the coming few months, which is a typical characteristic of a mature bull market.  Commodities have been underperforming equities for decades. In fact, the ratio of

commodities to equities is at a record low. With the dollar showing signs of softening as central banks turn increasingly accommodative, we expect commodities to be nearing the end of their bear cycle.

 As we are in the euphoric cycle, our analysis suggests that midcaps in India will outperform large cap by minimum 25%.

 Looking forward, we expect Nifty to extend gains in 1HCY20. We foresee the index rallying towards 13500 mark and as such, recommend creating longs above 12250, while keeping a stop loss of 11800.

Sectors which we like are Metal, Cement, Pharma, and Midcap.

FOCUS STOCKS FOR TRADING: Long ideas – Ramco Cement, Vedanta, Bharat Forge

Short ideas – Titan

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EUPHORIA PHASE KICKS IN AS ALL ASSET CLASSES RALLY

Equities, commodities, bonds, and currencies have all started to rally, indicating we have entered 3rd phase of business cycle, which is the euphoria phase

Source: Bloomberg, Edelweiss Professional Investor Research The above is an equal-weighted chart of all the four asset classes (equity, commodity, bond, and currency) from a global perspective. It can be seen that this index has given a breakout, indicating that the market is now entering a euphoria phase. On the previous occasions as well, during 2000 and 2008, the index had entered similar euphoria phase before falling steeply a few months down the line. The charts below show the performance of these individual asset classes.

Individual charts of the asset classes, each showing bullish breakouts

Source: Bloomberg, Edelweiss Professional Investor Research

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Notice from the above charts that each of these indices has started moving higher simultaneously, an indication that we are now entering the Euphoria phase. In the coming sections, we will talk about factors that have contributed to such euphoria as well as state our view as to why the current up trend is likely to extend for the next 5-6 months, before an eventual peak in the market.

WORLD MARKETS SURGE AS GLOBAL RATE CYCLE TURNS SOUTH

Fed begins cutting rates for the first time in nearly a decade

Fed Balance Sheet expansion and interest rate cut lift S&P 500 to a record high

Source: Bloomberg, Edelweiss Professional Investor Research

Over the course of 2019, not only did the Fed cut rates thrice but it also started expanding its balance sheet for the first time in over 5 years. This combination of rate cuts and balance sheet expansion has caused the S&P 500 index to rise to historic highs, while also breaking above a trend line resistance, signaling at gains in the coming weeks. Increased liquidity because of the Fed’s actions should offer equities support in the weeks ahead.

ECB continues its ultra-accommodative stance as growth remains fragile

Euro Stoxx index breaks 20-year secular resistance line, boosted by an accommodative ECB stance

Source: Bloomberg, Edelweiss Professional Investor Research

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While the ECB has been on a pause mode as far as rates are concerned, it has nevertheless been expanding its balance sheet. With inflation and growth expected to remain subdued in the coming months, the ECB is likely to maintain its accommodative stance and continue the ongoing €20b monthly bond purchases for the foreseeable future. Given this and considering that Europe’s headline markets have given a long-term breakout, we expect European equities to maintain bullish momentum in the weeks ahead.

BOJ too remains accommodative amidst struggling Japanese economy

Nikkei 225 continues to gain upside momentum, partly underpinned by BoJ’s liquidity push

Source: Bloomberg, Edelweiss Professional Investor Research Not only the Fed and the ECB but even the BOJ has been expanding its balance sheet at an unprecedented pace over the years to revive growth and inflation in Japan. This has now been accompanied by a breakout in the Japanese markets. Accommodative monetary policy of the BOJ along with the possibility of government spending in 2020 to partially mitigate the impact of sales tax hikes is likely to keep the Japanese markets supported in the coming weeks.

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Central banks around the world turning more dovish Country Policy Rate 3m Chg (BPS) 6m Chg (BPS) 12m Chg (BPS) Interest Rate Trend (12m) Argentina 52.00% -1500 -1500 -800 Cut Australia 0.75% -25 -75 -75 Cut Bahrain 4.00% -25 -50 -25 Cut Brazil 5.00% -150 -150 -150 Cut Chile 1.75% -75 -125 -100 Cut Czech Rep. 2.00% 0 0 25 Neutral Egypt 14.25% -250 -250 -350 Cut Hong Kong 2.26% -24 -49 -24 Cut Iceland 3.00% -75 -150 -125 Cut Central banks continue to India 5.15% -60 -85 -135 Cut be in an accommodative Indonesia 5.00% -75 -100 -75 Cut stance, boosting global Israel 0.25% 0 0 15 Neutral liquidity Malaysia 3.00% 0 0 -25 Neutral Mexico 7.50% -50 -75 -50 Cut New Zealand 1.00% 0 -50 -75 Cut Norway 1.50% 25 50 75 Hike Oman 2.22% -44.5 -71.6 -57.7 Cut Pakistan 13.75% 250 325 575 Hike Peru 2.25% -25 -50 -50 Cut Philippines 4.00% -25 -50 -50 Cut Qatar 2.00% -50 -50 -50 Cut Russia 6.50% -100 -125 -100 Cut Saudi Arabia 2.25% -50 -75 -50 Cut Singapore 0.08% 5 4 5 Hike South Africa 6.50% 0 -25 0 Neutral South Korea 1.25% -50 -50 -25 Cut Sweden -0.25% 0 0 25 Neutral Thailand 1.25% -50 -50 -25 Cut Turkey 14.00% -1000 -1000 -1000 Cut U.A.E. 2.00% -50 -75 -50 Cut Ukraine 15.50% -150 -200 -250 Cut U.S. 1.75% -50 -75 -50 Cut Venezuela 20.12% -338 -66 -93 Cut

Source: Bloomberg, Edelweiss Professional Investor Research 2019 has been a year that has been characterized by most global central banks easing their monetary policies. The primary objective was to revive growth and, more importantly, to prevent the adverse impact of global trade uncertainties. Notice in the table above that the number of red bars (rate cuts) clearly outweighs the number of green bars (rate hikes). This trend is likely to continue in the foreseeable future, which we expect to underpin risk assets, primarily equities.

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Fed Balance Sheet expansion and US, world market capitalization are closely linked

Expansion in Fed B/s is leading to an expansion in US & World market capitalization as well

Source: Bloomberg, Edelweiss Professional Investor Research Note above that the Fed B/s expansion and the US/world market capitalization are closely linked. Observe that the 135% Fed B/s expansion from 2009 to 2014 was accompanied by the US and world market cap increasing by a similar percentage during this period. Now, a 10+% increase in the Fed’s B/s in 2019 has again caused market cap to gain 10+%. This chart highlights that liquidity has played a key role in driving US markets higher. We expect the current rally to continue for as long as the Fed’s expansionary policies remain in place. Once this support from the Fed ends, the US markets are likely to attract selling pressure.

Despite the recent yield curve steepening, recession risks still prevail

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Looking at history, the odds of US slipping into recession in 2H20 still prevail

Source: Bloomberg, Edelweiss Professional Investor Research After having inverted in the 3QCY19, the US yield curve has since steepened quite a bit. History shows that the prior three recessions of 1990, 2000, and 2008 were each preceded by a yield curve inversion. On each of these occasions, the inversions were then followed by a steepening of the yield curve before the onset of a recession. This indicates that despite the recent steepening, the US remains in risk of slipping into a recession in 2HCY20, as indicated by the table above.

Consumer confidence at an extreme, indicating euphoric behaviour

Consumer confidence at a peak level, indicating that we are at the euphoria phase

Source: Bloomberg, Edelweiss Professional Investor Research The above chart compares consumer confidence (top) with S&P 500 index (bottom). Notice the solid and dashed red vertical lines. It can be seen that a peak in consumer confidence and a subsequent decline below its moving average has usually coincided with a peak in the S&P 500 index as well. The rectangular boxes show regions wherein after an initial blip, the index made a second high before eventually going lower. A similar kind of setup seems to be forming now.

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RALLY IN THE US MARKETS LED BY MIDCAPS US markets surge when Fed cuts rate well ahead of the start of recession

Fed rate cuts well ahead of the onset of a recession benefits US equities

Source: Bloomberg, Edelweiss Professional Investor Research Since the 1980s, there have been five occasions in which the Fed has cut its rates thrice i.e. without any hikes in between. During this time period, we have seen that if the Fed cuts its policy rates as a precaution against recession, the US markets rally sharply in the weeks ahead. However, cuts to fight an ongoing recession don’t have any positive impact on US markets. If history is to go by, then the current round of rate cuts by the Fed as a precaution against recession should bode well for the US markets in the weeks ahead.

During Fed cuts, US midcaps outperform as the dollar softens

Fed rate cut, if also accompanied by dollar softness, bolsters midcaps over large caps

Source: Bloomberg, Edelweiss Professional Investor Research

Since 1990s, there have been three major rate cut cycles that the Fed has undertaken. Historically, we have seen that there exists a negative correlation between DXY and Russell 2000 (US midcap proxy) to S&P 500 (US large cap proxy) ratio. In other words, this ratio underperforms when the Dollar is strengthening, and vice versa. With the DXY starting to show signs of cracks, midcaps could start outperforming large caps in the days to come.

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Steepening US yield curve underpins Midcaps over Large caps

A steepening yield curve following an inversion leads to broader market participation

Source: Bloomberg, Edelweiss Professional Investor Research The US yield curve (measured by the difference between the 10-year and the 3-month US yield) recently steepened after having inverted for a brief period of time. Historically, we have seen that on the past three occasions, whenever this spread has steepened after having inverted, it has led to strong rally in midcaps relative to large caps. The recent steeping of the curve following a brief inversion suggests that midcaps could start outperforming large caps over the next few weeks.

Diverging breadth indicates market could be in last leg of rally

The up move in US markets over the last couple of years has been accompanied by weakening breadth, indicating we might be in the final leg of bull market

Source: Bloomberg, Edelweiss Professional Investor Research The above chart compares S&P 500 index with its breadth, measured as the number of stocks trading above the 200dma. It can be seen that major tops in the index in 2000 and 2007 were accompanied by bearish divergences with breadth, suggesting that the final leg of rally in SPX was driven by fewer number of stocks. Even in 2015, a divergence formed between the two, but the correction then was moderate and not severe. Now, a major divergence has formed again, with the S&P 500 scaling new highs but with fewer stocks joining in the rally. This suggests that the current bull market could be in final stages of the up move.

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EMs THE KEY BENEFICIARIES OF AN ACCOMODATIVE FED With the Fed turning accommodative, expect Emerging markets to strengthen

Time cycle analysis suggests EMs could rally for a few more months, before eventually topping out

Source: Bloomberg, Edelweiss Professional Investor Research Emerging markets, as measured by the MSCI EM index, have exhibited three major trends since the turn of the century: a rally from 2004 to 2008, a consolidation from 2009 to 2015, and then a rally from 2016 till date. The current up move that started in 2016 has been 200 weeks old, as compared with the prior rally that lasted for 227 weeks. If time cycle is to repeat, then we are likely to see an EM rally continuing in 1HCY20, before potentially topping out.

Since 2004, EMs have had a strong negative correlation with the Dollar

Given the strong negative correlation between EMs and the dollar, a softening DXY is likely to offer a strong boost to EMs

Source: Bloomberg, Edelweiss Professional Investor Research The above chart can be split into two parts: before 2004 and after 2004. We can see that post 2004, the MSCI EM index has shared a very strong negative correlation with the DXY. This correlation turned positive only once, but that was negligible as it was for a very brief period of time. Since this brief hiatus, the negative correlation has started strengthening again. The DXY has recently broken below a rising wedge pattern, signaling at weakness in the days to come. This, we believe, will bode well for the MSCI EM index, moving forward.

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A weak Dollar leads to capital moving out of the US into other nations

A weakening dollar would benefit world markets more than it would benefit

the US markets

Source: Bloomberg, Edelweiss Professional Investor Research The above chart compares the DXY index with the MSCI ACWI to ACWI ex US ratio. The ACWI stands for All Country World Index. A rising ratio means ACWI is outperforming ACWI ex US, and vice versa. Notice the correlation between DXY and this ratio. A strengthening dollar leads to greater inflows into the US, causing ACWI index (the numerator) to outperform ACWI index ex US (the denominator), and vice versa. Ahead, with the Fed expected to remain accommodative in the foreseeable future, the DXY looks set to weaken, which in turn should cause capital to move out of the US and into other nations, such as EMs.

EMs to DMs ratio chart shows EMs at attractive levels

EMs to DMs ratio is at a 15- year low, indicating EMs are quite cheap relative to DMs at present

Source: Bloomberg, Edelweiss Professional Investor Research During periods of expansionary Fed policy, there is a tendency for emerging markets (EMs) to outperform developed markets (DMs). Similarly, during periods of contractionary Fed policy, the opposite occurs (2004 to 2007 was an exception though, as the China growth story offered a massive support to EMs despite tight Fed policy). It can be observed that EMs have been underperforming DMs for the past decade. However, with the Fed turning from tightening mode to easing mode, we believe that the EM underperformance could be in its final stages, before the tide changes.

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GLOBAL RISK APPETITE, TAX CUTS UNLEASH RALLY IN INDIAN MIDCAPS & SMALLCAPS NSE Midcap to Nifty ratio suggests we are entering Phase 5, the euphoria phase

NSE Midcap to Nifty ratio enters into Phase 5, the euphoria phase

Source: Bloomberg, Edelweiss Professional Investor Research The above chart is the ratio chart of Nifty Midcap index to Nifty index. We have split this chart into two phases: first is from 2001 to 2008 and second is from 2009 till date. We have seen that in each of the phase, the ratio has moved in 5 sub phases. Sub phase 1 and 3 are the strongest for the midcaps, while sub wave 5 indicates euphoria, a stage when midcaps outperform large caps very swiftly. Meanwhile, sub phases 2 and 4 indicate midcaps underperforming large caps. Currently, we seem to have ended sub phase 4 within phase (II). If history were to repeat, we could now enter sub phase 5, wherein midcaps outperform large caps swiftly.

NSE Midcap stocks at very attractive levels relative to US Midcaps

Indian midcaps at a much attractive levels relative to US midcaps

Source: Bloomberg, Edelweiss Professional Investor Research The above chart is the ratio chart comparing Indian midcaps with US midcaps. This ratio has been in an uptrend since 2004, but has recently broken its 15-year trendline. However, the break has not been accompanied by continued selling, as the ratio has been consolidating near the trend line for quite some time now. This has also been accompanied by the RSI forming a bullish divergence with price. If the ratio manages to move back above the trend line, it would signal that Indian midcaps could start outperforming US midcaps in the weeks to come.

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Compared to the global markets, Indian markets have more room for an up move Index Country % components above 20dma Index Country % components above 50dma CAC 40 INDEX France 60 CAC 40 INDEX France 70 DAX INDEX Germany 60 DAX INDEX Germany 63 FTSE 100 INDEX UK 69 FTSE 100 INDEX UK 74 Hong Kong 94 HANG SENG INDEX Hong Kong 76 KOSPI INDEX S Korea 56 KOSPI INDEX S Korea 45 Nifty 50 India 56 Nifty 50 India 52 Nifty 500 India 43 Nifty 500 India 50 Japan 85 NIKKEI 225 Japan 83 S&P 500 INDEX US 68 S&P 500 INDEX US 73 Given last year’s SHANGHAI SE COMPOSITE China 76 SHANGHAI SE COMPOSITE China 43 underperformance, Indian Index Country % components above 100dma Index Country % components above 200dma markets have more upside CAC 40 INDEX France 75 CAC 40 INDEX France 80 DAX INDEX Germany 77 DAX INDEX Germany 80 room than global markets FTSE 100 INDEX UK 70 FTSE 100 INDEX UK 74 HANG SENG INDEX Hong Kong 74 HANG SENG INDEX Hong Kong 50 KOSPI INDEX S Korea 45 KOSPI INDEX S Korea 28 Nifty 50 India 62 Nifty 50 India 54 Nifty 500 India 56 Nifty 500 India 45 NIKKEI 225 Japan 91 NIKKEI 225 Japan 81 S&P 500 INDEX US 73 S&P 500 INDEX US 78 SHANGHAI SE COMPOSITE China 38 SHANGHAI SE COMPOSITE China 29 Source: Bloomberg, Edelweiss Professional Investor Research The four tables above compare the breadth of some of the major global indices. The breadth indicator used here is simple moving average, namely the 20dma, 50dma, 100dma, and 200dma. The red vertical dotted line stands for the average of the number of constituents above a specific SMA. It can be seen here that the breadth of the Indian markets is below this average in all four cases, suggesting that the Indian markets have more room for an up move in the coming weeks than do the global markets.

Nifty seems headed towards 13000-14000 zone in the next few months

Subwave V of Wave 3 is in progress, which suggests at Nifty upside extending towards 13000-14000

Source: Bloomberg, Edelweiss Professional Investor Research The long-term chart of Nifty suggests that we are in wave 5 of larger degree wave III. As per our Elliott Wave count, wave 5 should ideally complete between 13000 and 14000. Post the completion of wave III, we could see one year of correction in the index.

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Wave 5 in NSE 500 index potentially underway

NSE 500 is in Wave 5 of an impulse pattern, which could take the index towards 12000

Source: Bloomberg, Edelweiss Professional Investor Research The NSE 500 index seems to have entered Wave 5 of the impulsive Elliott pattern. This would be further validated once the index sustains above 9920 level. As per the Wave theory, Wave 5 is the euphoric phase, wherein the index rallies sharply in a relatively short time span with broad market participation. As per the price projection, we could see the index rallying towards 12000, a region where a potential top could be made. COMMODITIES BULL MARKET COULD RESUME AS THE DOLLAR SOFTENS

Commodities to Equities ratio at record low, forms bullish divergence with oscillators

Commodity to equity ratio is at a record low, indicating commodities are extremely cheap at present

Source: Bloomberg, Edelweiss Professional Investor Research The above chart is the ratio chart of the GSCI commodity total return index to the S&P 500 index. It can be seen that, at present, the ratio is at the lowest level since 1970, indicating that commodities are extremely cheap compared to equities. Adding to this, the two major bottoms in the ratio (1974 to 1987 and 1990 to 1999) lasted an average of 10.3 years. The current downtrend in the ratio has been in place for the past 11.5 years, signaling that a turn in the cycle of the ratio could not be far away. Meanwhile, at key bottoms in the ratio, the S&P 500 has a tendency to turn down first before commodities gain upside traction. Given how depressed the ratio is at present and given how strongly the S&P 500 has rallied over the last few years, a similar such development cannot be ruled out in the coming months.

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Potential long-term top in the DXY could offer a strong boost to commodities

The Dollar index has historically followed a 16yr cycle

Source: Bloomberg, Edelweiss Professional Investor Research The above chart shows the long-term time cycle chart of the DXY index. Notice that each major DXY cycle, from one top to the next top, has lasted for 16 years. The third such cycle peaked out in 2017. Since then, the DXY has not made a new high. Historically, between two major successive peaks, the ensuing correction has been deep, with the index making new secular lows on each such occasion. If this time cycle holds, then over the next few years, the DXY could be in a severe downtrend, which if happens would offer a strong boost for commodity prices to begin their new leg higher.

Gold moving perfectly in sync with the US inflation-adjusted yield

Gold and US real yields continue to share a strong negative correlation

Source: Bloomberg, Edelweiss Professional Investor Research Since the start of 2019, gold has been trending higher, boosted by the downward trajectory in real yields. As can be seen above, gold shares a very strong negative correlation with inflation- adjusted yields (aka real yields), as measured by the 10y TIPS yield in the chart above. Since 2016, this correlation has been consistently negative, meaning that a drop in the yield on TIPS benefits gold, and vice versa. With nominal rates unlikely to rise any time soon because of the Fed’s dovish stance on its policy, we expect the downward pressure on yields to persist. This in turn is likely to offer support to gold.

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With Chinese manufacturing rebounding, industrial metals could gain bullishness momentum

A rebound in Chinese manufacturing PMI to expansionary zone has benefited non-ferrous metals

Source: Bloomberg, Edelweiss Professional Investor Research Another positive development for commodities, especially industrial metals, is that Chinese manufacturing PMI is showing signs of bottoming. After hovering just below the contractionary zone over the past few months, the PMI has moved back into the expansionary zone, indicating that the sector could be reviving. The recovery in base metal prices off key supports has also coincided with a rebound in PMI. If the Chinese PMI sustains above 50, then that should offer a strong boost for metal prices to head north.

Agricultural index breaking out of multi-year lows

Agricultural index is breaking out a multi- month trend line, signaling that bull trend could be starting

Source: Bloomberg, Edelweiss Professional Investor Research

The chart above is the Bloomberg agricultural index. This index comprises of coffee (10%), corn (20%), cotton (4%), soybeans (19%), soybean oil (11%), soybean meal (10%), sugar (11%), and wheat (15%). It can be seen that the index has just broken out of a 7-year downtrend line and that the RSI has broken out of a 12-year downtrend line. This indicates at the start of a new bull market in agro-commodities. Historically, since 1990, we have observed that whenever the index has given major breakouts, it has returned an average of 53% over the coming months. 16 Edelweiss Professional Investor Research – Trading Desk

Crude oil reverses lower from key resistance, hinting at a lower move

Crude oil seems to have formed a long-term top

Source: Bloomberg, Edelweiss Professional Investor Research In our previous ChartWatchers, we highlighted that WTI crude oil could top out around $65. Post the Iran US tension, crude oil prices surged higher towards $65 but failed to break the previous swing high, resulting in the formation of a big engulfing pattern near the long-term downward sloping trendline resistance. This, as per the Elliot wave theory, should mark a long term top in crude oil. WORLD CURRENCIES TO STRENGTHEN AS THE DOLLAR TURNS SOUTH

BRICS currencies forming bullish divergence with RSI

Equal weighted chart of BRICS currencies shows that the dollar could be set to weaken against these currencies

Source: Bloomberg, Edelweiss Professional Investor Research The above is the equal-weighted chart of BRICS currencies. Notice that the index has made a lower low, while the RSI is making a higher low, thereby forming a bullish divergence. If the RSI crosses the 60 hurdle, it will signal at the start of a bullish momentum. If this is then accompanied by the index breaking above its immediately prior high, it would suggest that BRICS currencies would start strengthening against the Dollar in the coming months.

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EUR/USD volatility at the lowest since at least 2003

EUR/USD ATM 3-month IVs are the lowest level since the early 2000s, signaling that volatility could erupt soon

Source: Bloomberg, Edelweiss Professional Investor Research The chart above shows the Dollar index on the top and EUR/USD 3-month Implied Volatility (IV) on the bottom. An interesting thing to note here is that the IVs for EUR/USD are currently at the lowest level since the time the data is available. Usually, contraction in IVs to such depressed levels is followed by a sharp move in the currency pair over the coming weeks. While IVs do not tell about the direction in which the move occurs, given our stance on the Dollar as mentioned earlier, we expect the pair to head higher once IVs pick up.

Short-term trend of DXY turns lower

The short-term trend of the DXY has turned south

Source: Bloomberg, Edelweiss Professional Investor Research As per our Elliott Wave count, we expect weakness in the DXY to continue in the short-term. On an immediate basis, we could see a minor pullback in the DXY given the end of minor subwave (v). However, overall, given the wave structure, the index seems headed towards 96-95 levels in the next few sessions.

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History suggests consolidation or a correction in USD/INR There were two major bear market instances in the DXY in the past.

The first bear market period (see chart below) formed between 1984 to 1987. During this period, USD/INR consolidated before breaking higher.

DXY Index

During the 1984 to 1987 DXY bear market, USD/INR consolidated within a USD/INR triangle pattern

Source: Bloomberg, Edelweiss Professional Investor Research In the second bear market (see chart below) that lasted from 2001 to 2007, USD/INR depreciated in tandem with the fall in the DXY.

DXY Index

During the 2001 to 2007 DXY bear market, USD/INR depreciated in tandem

with the fall in DXY

USD/INR

Source: Bloomberg, Edelweiss Professional Investor Research Thus, if history has to repeat now, USD/INR appreciation looks unlikely in the medium-term.

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The short-term trend of the DXY has turned south

Source: Bloomberg, Edelweiss Professional Investor Research As per our Elliott wave count, USD/INR has completed subwave (iii) of larger wave 3. What this means is that in the short-term, there could be a correction in the form of subwave (iv). This consolidation could be in the range of 66 to 75. INDIA SECTORAL ANALYSIS

NSE Metal Index suggesting at a turn in time cycle

NSE Metal index time cycle chart

Source: Bloomberg, Edelweiss Professional Investor Research The chart above shows the NSE Metal index. It can be seen that the index has not only completely retraced its prior decline, but has also done so in essentially the same time. The index has now broken out of a downward sloping channel, indicating that it is poised to head higher in the weeks ahead.

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NSE Pharma Index indicating at a move higher

NSE Pharma index starting to show signs of strength

Source: Bloomberg, Edelweiss Professional Investor Research The above chart is the NSE pharma index. It can be observed that the index has given an inverse H&S breakout and is now close towards breaking out of a falling wedge pattern. A breakout out of this wedge pattern would signal at a stronger rally in the weeks ahead.

Cement sector stocks are showing strength

Equal-weighted cement index comprising of major cement stocks has broken out on the upside

Source: Bloomberg, Edelweiss Professional Investor Research Above is the equal-weighted Cement Index chart comprising of JK Lakshmi, Ramco, JK Cement, Shree Cement, and Ultra Cement. If we go back to Dec 18 - Jan 19 period, the index had given a four month breakout and after that it gave an upside move of 31%. Currently, the same phenomenon is taking place wherein the index has given an eight month trendline breakout with an expansion in volume. Thus, going forward we can see upside momentum in the index.

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Midcap 100 index could see a sharp rally in the days ahead

Midcap 100 index could see a modest decline, before beginning a sharp move higher

Source: Bloomberg, Edelweiss Professional Investor Research After exiting from a 2-year downtrend, the Midcap 100 index seems to have bottomed out. As per Elliot, wave 1 seems to have ended in the form of a leading diagonal. This suggests that we could see a small decline in the index in the form of wave 2, which should be used as a buying opportunity for an upside towards 20000. STOCK PICKS

Buy – RAMCO CEMENT

Buy Ramco Cement for a target of 1000

Source: Bloomberg, Edelweiss Professional Investor Research Ramco Cement is breaking out of a triangle pattern with the emergence of a strong bullish candle. The stock has reversed off its key 50-weekly moving average, strengthening the case of an up move. We see the stock heading towards 1000 in the days ahead as long it holds above 690.

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Buy – BHARAT FORGE

Buy Bharat Forge for a target of 580

Source: Bloomberg, Edelweiss Professional Investor Research Bharat Forge has broken out of an inverse head and shoulder pattern. In doing so, it has also moved above its 50-weekly moving average. With the stock holding long-term support zone and now giving a breakout, we expect it to go higher towards 580 as long as it holds above 450.

Buy – VEDANTA

Buy Vedanta for a target of 200

Source: Bloomberg, Edelweiss Professional Investor Research Vedanta has broken out of a falling wedge pattern with the breakout also being accompanied by a positive divergence that had formed previously with the RSI. The stock is also just breaking above the key 50-weekly moving average, which was not broken since mid-2018. All this suggests at a move higher in the stock towards 200 as long as it holds above 140.

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Sell – TITAN

Sell Titan below 1140 for a target of 1000

Source: Bloomberg, Edelweiss Professional Investor Research The stock is showing clear signs of weakness on the weekly time frame. Not only has it formed a double top pattern, but this double top has also been accompanied by a bearish divergence being formed with the RSI. Given that the stock is now breaking below the 20-weekly and 50-weekly MA, we expect it to head lower towards 1000 once it breaks its immediate support of 1140. We suggest maintaining a stop loss of 1180.

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Vinay Khattar

Head Research

[email protected]

25 Edelweiss Professional Investor Research – Trading Desk

Disclaimer

Edelweiss Broking Limited (“EBL” or “Research Entity”) is regulated by the Securities and Exchange Board of India (“SEBI”) and is licensed to carry on the business of broking, depository services and related activities. The business of EBL and its Associates (list available on www.edelweissfin.com) are organized around five broad business groups – Credit including Housing and SME Finance, Commodities, Financial Markets, Asset Management and Life Insurance. Broking services offered by Edelweiss Broking Limited under SEBI Registration No.: INZ000005231; Name of the Compliance Officer: Mr. Brijmohan Bohra, Email ID: [email protected] Corporate Office: Edelweiss House, Off CST Road, Kalina, Mumbai - 400098; Tel. 18001023335/022-42722200/022-40094279

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Disclaimer

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Disclosures under the provisions of SEBI (Research Analysts) Regulations 2014 (Regulations) Edelweiss Broking Limited ("EBL" or "Research Entity") is regulated by the Securities and Exchange Board of India ("SEBI") and is licensed to carry on the business of broking, depository services and related activities. The business of EBL and its associates are organized around five broad business groups – Credit including Housing and SME Finance, Commodities, Financial Markets, Asset Management and Life Insurance. There were no instances of non-compliance by EBL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. This research report has been prepared and distributed by Edelweiss Broking Limited ("Edelweiss") in the capacity of a Research Analyst as per Regulation 22(1) of SEBI (Research Analysts) Regulations 2014 having SEBI Registration No.INH000000172.

27 Edelweiss Professional Investor Research – Trading Desk