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India’s Equity Bull Market: Who foresaw it in October 2008?

India’s Equity Bull Market: Who foresaw it in October 2008?

By Elliott Wave International

This chart tells you everything you need to know about the opportunities that financial forecasting firm Elliott Wave International (EWI) sees in India’s stock market:

  • A multidecade bull market began in Indian stocks in the year 2003.
  • Even in the depths of the 2008 financial crisis, EWI forecast that the bull market would continue.
  • Its forecast has remained valid despite all the political volatility of the past six years in India. In other words, politics has in no way influenced EWI’s analysis.

Most political commentators credit the recent surge in Indian stocks to the electoral victory in May by India’s Bharatiya Janata Party and its charismatic new leader, Narendra Modi.

But Elliott Wave International looks at stock market trends from a different perspective: Its analysts believe that financial trends ebb and flow in waves.

You may have heard the term supercycle. It refers to a long-term boom in a financial market lasting at least several years and as long as several decades.

According to EWI’s analysis, a supercycle began in Indian stocks in the late 1970s, when the BSE Sensex Index began. Within that long-term trend, a smaller boom (which they call a cycle) began in 2003 in India, paralleling similar booms in other emerging markets around the world.

The good news is that India’s cycle bull market still has plenty of years ahead of it. In fact, EWI believes that the biggest opportunities in the cycle boom for Indian and international investors are happening right now.

Want to learn more details? Then you should read the special Interim Report that EWI’s Asian analyst issued on March 23, 2009, to alert his subscribers to the “rewarding long-term opportunity” he foresaw in Indian stocks then. It’s an excellent example of how their analysis can help you to see the bigger picture that those caught up in the news and politics often miss. It will also explain to you the cycle pattern that is driving India’s bull market today — and that will continue to do so for many years.

To get started reading the whole report now for free, all you have to do is become a Club EWI member. There are no strings attached. It’s free for you to learn more about the amazing long-term opportunities in India that only the Wave Principle can help you to take advantage of.

Club EWI is the world’s largest Elliott wave community with more than 325,000 members. Membership is 100% free and includes free reports, tutorials, videos, special events, promotional offers, and access to other valuable EWI resources.

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This article was syndicated by Elliott Wave International and was originally published under the headline India’s Equity Bull Market: Who foresaw it in October 2008?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Stock Market Update: Be Cautious

stock market bear 2014 got off to a rough start for stock market investors. January was a smack in the face as the markets decided to go for a five percent nosedive. But they recovered (again) in February and the indices have gone on to put up new all-time highs.

 

The current bull market has past its fifth birthday. It is on the verge of breaking the top three longest stock market rallies in history. With an increase of more than 150 percent for the Dow Jones index from its March 2009 low, the magnitude and momentum of this bull market is just as qualified for the history books as its duration. That is clearly visible on the following chart.

You can also see that we have seen better and longer bull markets in the past. In the ‘50s, we had a seven year bull market and the bull market of the ‘90s lasted for almost ten years! Just to be clear: a bull market remains theoretically intact as long as an index does not drop by more than 20 percent from a high. There is plenty of upside in other words, but the air does get thinner the higher we go. Naturally, the upward potential has decreased and as history has taught us, at one point the cable on this elevator will snap and we will go down a lot faster than we came up.

Bull-markets-duration-vs-magnitude

The question, of course, is when will the music stop? That has always been the $64,000 question. With regards to valuation, we are already in overtime at the moment. The markets are generously valued at this point, particularly when looking at market capitalization versus GDP (Warren Buffett’s favorite indicator).

Another indicator is also showing warning signs. The Tobin Q ratio measures the total market cap of non-financial listed companies in relation to the replacement value of the assets of these companies. The ratio is a good check to see if the fair value of these companies is deviating from their stock price. Above 1x, this ratio indicates that investors are prepared to pay more for expected performance and goodwill.

Tobin-Q
The above chart from clearly shows that the actual position of the Tobin Q ratio, as well as the adjusted version, has been living north of the 1x level since the fourth quarter of 2013. In the past, namely in the seventies, the current position would have been enough to cause turmoil. Naturally, there are exceptions as evidenced by spike around the dot com boom, but still…

Still, it feels like the 2000-period on the stock market. Just have a look at the chart below, which compares the S&P 500 to the Rydex Asset Ratio (Bears versus Bulls). It’s been 13 years since the ratio dropped this low. Investors are pouring massive amounts of cash into equity funds (long only) and liquidating their short / hedge funds and money market funds. This again is huge warning sign for the markets.

Rydex-Asset-Ratio-2014
That is the problem investors have today. On the one hand, valuation and duration are above average, but that does not necessarily mean that we are at the dawn of a big stock market correction. This stock market rally could last for a few more years and valuations have a lot more room to grow before we can even start talking about a bubble.

That is why vigilance is in order. Indeed, investing is making an estimation regarding the future, taking healthy probabilities into account. As the market rally persists, its effective life span decreases, that makes logical sense. Unfortunately, logic is not always what governs the stock market. Nevertheless we have become more cautious in 2014.

 

Retail Money Market Funds Signal Reversal for the Stock Market

(Video) Retail Money Market Funds Signal Reversal for the Stock Market
Steve Hochberg on the state of retail money market funds vs. stock market capitalization, filmed at the 2014 Las Vegas Money Show

By Elliott Wave International

Editor’s note: The article below is adapted from the transcript of the live presentation above, originally recorded at the 2014 Las Vegas Money Show. It features Elliott Wave International Chief Market Analyst Steve Hochberg. Hochberg is co-editor of The Elliott Wave Financial Forecast, one of EWI’s flasgship market letters. Click here for a free excerpt from Hochberg’s latest issue.

This chart is a picture of retail money market funds as a percentage of market capitalization.

In other words, when people are super bullish, they don’t want to hold any money in money market funds. They want to invest it, right?

Because why hold money aside when you don’t think the market’s going down, when it can be in the market if you think it’s going up?

When people are super bearish, what do they do? They take money out of the market, and they put it into money market funds hoping to wait out what they view as a declining market.

Now look at the upward spikes in this chart.

You can see that there was a high percentage of money in money market funds as a percentage of market cap back in 1982 as the market was bottoming and starting that great bull market.

Shortly after the 1987 crash, people got really scared; and again in 2002 after the market had been down 38%, and also in 2009 after the market declined 58%.

We are now at a new all-time low in the percentage of retail money market funds relative of market cap at just 2.8%. In other words, people are fully invested.

Investors are so optimistic about the future, they see no reason to keep money in money market funds in case the market goes down.

This is a classic warning sign that a reversal is ahead.

For a free excerpt from Steve Hochberg’s latest, July Elliott Wave Financial Forecast, click here. For a limited-time, EWI is giving away free access to a big chunk from the latest issue, complete with specific forecasts, analysis and labeled charts.

What the VIX Says About Stocks Today

The market’s crystal ball is giving us a warning sign.  Watching the price action in Volatility Index (VIX) options is like staring into a crystal ball for the stock market.

The Volatility Index is a measurement of fear in the marketplace. When the VIX is high and rising, investors are scared and traders are bearish. A low and declining VIX indicates strong bullish sentiment and complacency among traders.

Fear GuageThe VIX is a good contrary indicator, and it does help warn investors when the market is at extreme levels. Today the VIX is a historically low levels. Some of the best forward looking clues about future stock market performance come from VIX options.

VIX options are European-style contracts – meaning they can only be exercised on option-expiration day. This eliminates any possible “arbitrage” effect (the act of buying an option, exercising it immediately, then selling the underlying security for a profit). So VIX options will often trade at a discount to their intrinsic value.

For example, on July 11, the Volatility Index closed at 12.08. But the VIX July 14 puts – which are intrinsically worth $1.92 – were trading at only $1.60. That’s a $0.32 discount to intrinsic value…
If it were a regular American-style stock option, you could buy the put, exercise it, and liquidate the position, picking up $32 for every contract you traded. The European-style feature prevents that from happening – because you can only exercise this contract on July’s expiration day.

This makes VIX options difficult to trade. It is remarkably difficult to profit by trading options on the VIX.

But we can still benefit from VIX options… they provide clues about where traders expect the VIX to be on option-expiration day.

The current VIX option prices tell us that traders expect the VIX index to move higher in the months ahead. The VIX July 12 calls closed last week at $0.75, while the July 12 puts were only $0.19. In other words, option traders were willing to pay three times more to bet on the VIX moving higher than on it moving lower.

The difference is even more significant going out to October. The VIX October 12 calls are trading for $3, while the October 12 puts are just $0.40. So options traders are willing to pay seven times more to bet on the VIX moving higher than on it moving lower by the October expiration day.

VIX option traders clearly expect volatility to move higher over the next few months. And rising volatility usually translates into falling stock prices. With the market trading at all-time highs, it’s time to be cautious on stocks right now.

A Financial Storm Approaches

It is so easy for a country to print money… Said another way, it is so easy for a government to create inflation.

Because it’s so easy, nobody believes that DEFLATION – the opposite of inflation – is possible.

But it is

Financial StormEarlier this week, Republican politicians proposed a bill that would limit the powers of the Federal Reserve.

We are all for limiting the powers of government… But if the Fed’s powers are limited, its ability to print money would be limited… If this happens, persistent deflation could be an outcome – and that could trigger a financial storm that nobody is expecting.

“The most likely path of the Federal Reserve policy in the years ahead is the continuation of massive money printing to fend off deflation,” Jim Rickards writes in his excellent book The Death of Money. However, “the Fed may reach the political limits of printing.”

This is a scary thought for the Fed.

“Deflation is the Federal Reserve’s worst nightmare for many reasons,” Rickards explains. The new bill proposed by the Republicans is an example of the Fed reaching the political limits of money printing.

For one, “Deflation increases the value of government debt, making it harder to repay. If deflation is not reversed, there will be an outright default on the national debt, rather than the less traumatic outcome of default-by-inflation.”

Even worse, deflation “feeds on itself and is nearly impossible for the Fed to reverse.”

If deflation actually takes hold, how can we get out of it?

Rickards explains it: “The only way to break deflation is for the United States to declare, by executive order, that gold’s price is, say, $7,000 per ounce, possibly higher.”
Deflation can be broken when the dollar is devalued against gold, as occurred in 1933 when the United States revalued gold from $20.67 per ounce to $35.00 per ounce… If the United States faces severe deflation again, the antidote of dollar devaluation against gold will be the same, because there is no other solution when printing money fails.”

To be clear, Rickards isn’t actually predicting deflation…

He says we’re in an epic battle between inflation and deflation… where the government desperately wants to create inflation.

Conventional wisdom dictates that the government will succeed in creating inflation. But Rickards’ book describes an eye-opening, credible argument on deflation could actually take hold.

The actions this week by House Republicans suggest that Rickards is right – there is a legitimate risk that the Fed “may reach the political limits of money printing.”

We highly recommend you pick up  The Death of Money… It will open your eyes…