The surge in Indian stocks that turned the CNX Nifty index into Asia’s top performer is nearing an end, according to Tom DeMark, the creator of indicators to show market turning points.
The Nifty hit a level yesterday that signaled gains are “exhausted,” DeMark said in an interview, citing his Combo indicator. The index may increase about 3 percent in coming days, before reversing course to post an 11 percent retreat, DeMark said. It has rallied 4.9 percent during the past month and closed at an all-time high yesterday.
Investors have piled into India’s $1.3 trillion stock market amid growing expectations that the main opposition coalition, led by the Bharatiya Janata Party’s Narendra Modi, will win national elections and take steps to revive economic growth. Such optimism is typical of market tops, according to DeMark, who said the last time his indicator gave a similar reading was on Dec. 9. That preceded a 5.7 percent drop in the Nifty during the next two months.
“We may have a slightly higher high in the Nifty, but we’re almost there,” said DeMark, the founder of DeMark Analytics LLC in Scottsdale, Arizona, who has spent more than 40 years developing market-timing indicators. “What you want to see is good news at the top, which is what we’re seeing right now, where there’s a lot of ignoring of negative news.”
The Nifty climbed about 1.4 percent yesterday after exit polls on May 12 showed the opposition alliance probably won the most seats in national parliamentary elections, for which final results will be announced May 16. The polls offset data showing India’s retail inflation accelerated at the fastest pace in three months while factory output declined, adding pressure on the central bank to keep rates elevated.
The rally in stocks propelled 22 of the Nifty’s 50 members to 52-week highs, data compiled by Bloomberg show. That’s the biggest proportion since April 2006, about a month before the Nifty began sliding into a bear market.
Investor expectations that the elections will deliver a decisive Modi victory are so high that even a small disappointment may trigger a retreat, Jagannadham Thunuguntla, the chief strategist at SMC Global Securities Ltd., said in a phone interview from New Delhi yesterday. He’s advising clients to pare holdings in some of their winners before poll results are announced.
Indian stocks are due for “a breather,” Societe Generale SA analysts, led by Vivek Misra, said in a note dated yesterday. SocGen recommends investors sell Indian shares and buy stocks in “more attractive” Asian markets such as China.
Shares may experience a “final impulse to the upside” before they peak, DeMark said. The Nifty may climb to as high as 7,800, or 9.7 percent above yesterday’s close, if the final election results don’t vary much from exit polls, Sahil Kapoor, the chief technical strategist at Edelweiss Securities Ltd., said by phone yesterday. The gauge closed unchanged in Mumbai, after falling as much as 0.4 percent earlier.
On Jan. 23, DeMark told Bloomberg News that China’s Shanghai Composite Index would probably bottom out within days and rally “sharply.” The gauge reached a closing low on Jan. 30, then climbed more than 5 percent over the next three weeks. He said May 1 that U.S. stocks may fall 11 percent starting as soon as the following week, should some price patterns come true. The Standard & Poor’s 500 Index closed at a record yesterday.
DeMark has provided consulting to hedge funds including George Soros’s Soros Fund Management LLC and Leon Cooperman’s Omega Advisors Inc. His company makes money by charging traders for access to its indicators. It also sells subscriptions to the indicators on the Bloomberg Professional service. Bloomberg LP, the parent of Bloomberg News, takes a percentage. DeMark has a similar arrangement with Thomson Reuters Corp.