Bitcoin

In my first post on Bitcoin on 20^th December 2017, I wrote, “Bitcoin is going to get interesting in coming days and it may not be pretty for many investors.” Bitcoin was trading at 17250 USD and I was expecting a very sharp correction in Bitcoin.

 In my follow up a post on 5^th February 2018 , I wrote, “Since then the price of Bitcoin crashed by more than 50% and is currently trading at 7360, Minor support for bitcoin exist at 6800 levels but I feel that it will just give some small respite to the speculator. Bitcoins should fall below 4000 in coming days.” Since February till last week Bitcoin consolidated at 6000- 8000 levels as expected and it broke below the support recently.

As you can see in the following chart. Bitcoin has broken below the support. It is currently trading at 4600 USD and very near to my expected target of 4000. I suspect that once it breaks 4000 it's going to be a very ugly site. The long-term chart of bitcoin suggests correction could go below 2000 but that will happen only once it trades below 4000 levels.  

Shanghai Composite

In my previous post on 8^th January 2016, Shanghai Composite index, I wrote, “Shcomp moved up from 3285 to 5050 levels before the equally spectacular crash after completing my target. Shcomp looks weak and will correct going forward.”

In the last three years, Shanghai composite continued its correction and made a low of 2479. The correction looks impressive if we consider that the index had spent three years doing time correction. 

If we look at the given chart, Shanghai Composite looks very interesting. Shanghai Composite is trading at the lower end of the 25-year-old channel and in past, it had bounced back from these levels for three times generating multi-bagger returns.

It seems to me that China is on the cusp of a major change if these levels hold Shanghai composite can multiply 2X or 3X from current levels in the next 5 years.  The risk-reward ratio seems extremely attractive from current levels.

Summary

1.      Long on Shanghai Composite at 2679

2.      Stop loss below 1900
3.      The target of 5000+ levels the over the next five years. 

Crude oil

In my previous post on crude oil written on 26^th November 2017, I wrote, “Any breakout above 60 USD looks difficult, I think crude will consolidate between 50$ - 60$ before any further breakout which can push the prices to 70$ – 77$ level. I think the most likely reason for the breakout will be further deterioration in the geopolitical situation in major oil-producing countries.

If we look at the long-term chart of crude, I think the bear market in crude oil started in 2008 and we are already into 10 years of bear market. I don’t think we are going back to 100$ levels anytime soon but crude is very likely to consolidate and trade between 50$ to 77$ depending on the geopolitical situation. I continue to maintain an upward and positive bias on crude oil over next 2 years with short-term correction looking imminent.”

Crude oil did not correct as excepted but it broke above the resistance level and hit the upside target of 77 USD as mentioned in my post. Since then Crude has corrected by 20%.

If we look at the given chart of WTI crude, we can see that it has a strong support at 60 USD. Most likely we will see a 6% to 10% bounce from the current levels and it may move up to 65$, but I expect that to be short lived. I think the price will again fall from there to 55$ where it will test the long-term channel support. This can happen before the end of December 2018

Summary:-

·         Expect WTI to fall to 55 USD before the end of December.

·         There can be some intermediate bounce in the price to 65$

·         Crude should find support at 55 USD

Tech Musings

In my previous post on INR, on 8^th July 2018, I wrote, “If we look at the given chart we can see that INR made a high of 68.85 on 27^th August 2013 and had been trading below that level since then. Once INR breaks above 69 we will see some quick depreciation of INR to 73 – 74 levels.”

Since then INR has deprecated significantly and is currently trading at 73.75 levels which has hit my expected target. While most of the other analysts were surprised by the sudden weakness I think this was on cards for a long time.

If we look at the current chart of INR the target for the pattern comes at 76 -77 and INR should depreciate to those levels in the next 1.5 years. 

Indian equity markets and emerging markets, in general, underwent significant corrections recently. Although I don’t try to contemplate the reasons for market movements as I believe that there can be many reasons for markets to move and it’s hard for our mind to fathom all of them. The recent correction in EM assets could be because of cash outflows from EM assets. With Global central bank reducing liquidity from markets and FED tightening interest rates, US assets have become much more attractive, hence the situation may persist for another 12 – 18 months.

This could also be partly due to hike in crude oil prices which creates current account deficit for many EM countries and the global turmoil in the global political environment (there is always something interesting happening in global geopolitics)

Putting these explanations aside let us look at the price target for the current correction in the context of Indian markets. Since elections are near and if the current government loses the election the correction in the market can be quite significant. Hence I am contemplating two scenarios.

If we look at the long-term yearly chart of Sensex the trend line support exists at 33000 levels. Which means that Index should not fall below 33,000 otherwise long-term trends will be broken and we will be in a multiyear bear market. We can see the support marked on the chart with an arrow. A multi-year bear market should not happen unless we have a major geopolitical event and break down in global trade system. Hence this scenario looks highly unlikely to me and I believe that most likely index will bottom out at 33,000.

In the second scenario let’s assume that the current government loses power and the selloff intensifies and becomes more India centric then chart can look something like this.  

Which means that we can see the formation of a head and shoulder pattern on the chart with the neckline at 33000. 

So the current fall should continue till the market hit 33000, then there should be a bounce of 3000 points, which will form the right shoulder and sell off should follow once we break the neckline and market should fall to 26000. This should bring us back to the lows of November 2016.

If we look at the weekly chart, we can clearly identify the channel which shows the 26000 levels as marked by the arrow.  

If we look at the small-cap index which is already battered in recent fall (-30%), we may see levels up to 12500 on BSE small Cap index which is another 10% fall from the current levels. 

Summary:- 

1       INR has hit my target of 74, may further depreciate to 76 levels.

2.       Indian market will continue to fall; my preferred scenario is that Sensex will find support at 33,000 levels.

3.       In case things turn bad and Modi government loses the election the market may further slide to 26000

4.       The five-year target for nifty stays at 15000, - 18000 levels.

5.       The market will become extremely attractive if it falls to 26000.

Indian rupee

In my previous post on INR, on 16^th November 2016, I wrote, “Since then INR has been consolidating between 66 – 68. If we look at the current chart of INR it had broken out of the triangle pattern. The first resistance is at 69 and once that is taken we can see some serious depreciation in INR v.s USD”

As expected INR moved up from 67.84 to 68.85 but it could not break out of the resistance and subsequently strengthened to 64 levels.  After consolidating between 64 – 68 levels for last 1.5 years INR seems to be ready to break out of the range. 

If we look at the given chart we can see that INR made a high of 68.85 on 27^th August 2013 and had been trading below that level since then. Once INR breaks above 69 we will see some quick depreciation of INR to 73 – 74 levels. 

US interest rates

In my previous post on US interest rate written on 27^th Feb 2017, I wrote the following,

“The last chart is a quarterly chart of US Treasury 10-year Yield. US   YR yield made a high of 15.82% in 1982 and a low of 1.318 in 2016. If we look at the given quarterly chart this is the first time in last 34 years that the yield broke out of a downward sloping channel.

This can lead to two possible scenarios

1.      Interest rates will again fall below the breakout line and interest rates will stay benign in US

2.      If Interest rates sustain above the channel breakout, then Yield will move towards 4% range.

Since I had some bitter experience with interest rates forecasting which is controlled by fed, I will abstain from forecasting interest rates but my best case expectations call for a breakout.”

Since then 10-year interest rates have moved up to 3.11 and had broken above 3.05 level which was the peak from last 7 years. I think interest rates will trade to 3.55% - 3.65% where they will face long-term resistance at the trendline.

Whether interest rates will be able to sustain above 3.55% or not is anyone’s guess, but if FED continues to hike rates it does have a chance to move above it although the move can be transitory in nature.

Yield Curve Slope in a Rising Rate Environment.

We were analyzing the relationship between FED fund rate and 10 years US treasury yield to understanding the impact of fed fund rate hike on yield curve slope. We chose to use FED fund rate instead of 2 year UST as we believe that FED fund rate is a controllable variable and it is used by FED to set interest rates for the various duration, while 2-year treasury rate is still decided by the market.

If we analyze the data for past 30 years we can see a consistent trend. In the past 30 years, there has been three major FED rate easing cycle which played out between 1987 -1990, 2000 -2003 and 2008-2010 as evident from the chart.

Similarly, there have been four episodes of rate hiking starting from 1982 -1987, 1994-2000, 2004-2006 and 2015 – present.  Surprising the relationship between the 10 years and Fed fund rate has remained amazingly constant.

If we look at the given chart we can see that the maximum difference between 10 years - Fed fund rate is 3.3% -3.9% which happens when FED fund rates are lowered to support the economy.

Similarly, the yield curve spread gets inverted at the peak of rate hiking cycle. We saw this is 1989, 2000 and 2007 where the yield curve spread was negative from -0.58 to -1.02.

The current spread between 10 years UST yield and FED fund rate is at 1.41% which means that FED will have to increase rates by at least 1.75% to 2.0% for the spread to be negative by -0.5% or 10 year UST Yield will have to fall by 2% for the spread to be negative by -0.5% Or it will be a combination of both which will signal the end of current rate tightening cycle.

But before we go to forecasting the terminal fed fund rate let us first understand why this relationship has been consistent over different market cycles.

 In the above diagram, we have plotted the FED fund rate on X-axis and 10 year UST yield on the Y-axis. We all know that FED reduces the rate to boost economic growth and to fight deflation which happens during the period of the economic crash. From the recent episodes, we saw that when fed fund rate hit 0.25%, the average yield of 10 years UST was 2.37% during that period. The question to my mind is that why didn’t 10-year yield fell much lower? I think that this happened because of the markets price in a long-term inflation expectation in long-term rates. Or in other words, even when the current inflation is very low, market assumes that over a period ten-year inflation will be higher and hence they demand a higher yield to compensate for longer-term inflation.

Similarly, when FED hikes rate to reduce inflation/slow down economic growth the FED fund rate moves above 10-year yield because markets price in that over next 10-year inflation will not be as high as it is now hence short-term rates move above longer-term rates as market do not factor a very high inflation component over longer-term period and the yield curve gets inverted which we saw in 1989, 2000 and 2007 where short-term rates were higher than longer-term yield. 

The implication of this on bond investing

The investor should increase the duration of the portfolio if yield curve gets inverted which means that from then onwards FED fund rates will move lower and along with it longer-term interest rates will also move lower. Similarly, when the difference between 10year – FED is above 3% the investor should lower the duration of the portfolio as FED will start hiking rates and along with it, long-term interest rates will also move high.

Similarly, the investor should reduce the credit risk from the portfolio when yield curve gets inverted. Because as fed hikes rate to cool down the economy it increases interest cost, slows down economy and lot of lower rated companies will default on their bonds hence the credit risk in the market will go up.

While the investor should increase the credit risk in his portfolio when the difference between 10 years – FED rate is above 3% as it means that economic growth is anemic and disinflationary threat persist which will cause interest cost to go down and will be a prove more benign credit environment for lower graded companies.

Extrapolation in the current market fed fund rate hiking cycle

Assuming that the past relationship holds true, we can use this relationship to predict terminal fed fund rate or terminal 10 years US treasury yield.  If I look at the long-term chart of 10 year UST yield the trend line resistance is at 3.5%

Assuming that 10-year yield doesn’t break this trend line it should peak out at 3.5%. and accordingly, if the yield curve will be inverted at the peak of the FED tightening cycle FED rate should be peak out around 3.5% to 3.75% to have inverted yield curve.

The current FED fund rate is around 1.5% and we are expecting FED to hike by at least 75 BPS in 2018 and another 75 BPS in 2019 which will bring FED fund rate to 3.0%. Assuming Fed hike rates by another 50 BPS in 2020 that should mark the end of the interest rate hike cycle and economic expansion. Depending on whether FED wants to expand the economic growth cycle or reduce it can expedite or delay the rate hikes.

If I extrapolate it a little further it also means that S&P500 should make a new high by that time and start a correction somewhere in 2020.

Bitcoin

In my previous post on Bitcoin written on 20^th December I wrote, “Everyone talks about Bitcoin these days. I was just looking at the chart of Bitcoin and it looks like a perfect parabola. Generally, a perfect parabola is formed at the peak or bottom of the bull/bear market. This is not the first time Bitcoin is witnessing such parabolic rise. It had happened in 2014 -2015 when bitcoin moved up from sub 100 levels to 1127 and then fell to 200. Although I do not have any fundamental view on Bitcoin, from my understanding of asset prices, it seems that Bitcoin is going to get interesting in coming days and it may not be pretty for many investors.”

Since then the price of Bitcoin crashed by more than 50% and is currently trading at 7360, Minor support for bitcoin exist at 6800 levels but I feel that it will just give some small respite to the speculator. Bitcoins should fall below 4000 in coming days. 

Indian Market

In my previous post on 22^nd February 2017, I wrote, “Nifty was trading at 8111 levels and it made a low of 7893 and reversed from there as expected. Since then Nifty is up by almost 10% in last three months. As I have mentioned in my previous post I expect Nifty to perform spectacularly well in next two years. I won’t be surprised if I see Nifty breaching 10600 – 11000 by the end of current year.”

Nifty closed the year 10530 and is currently trading at 11000 levels. If we look at a longer-term chart of index the upside target can be 15000 -18000 over next five years. 

Similarly, in the same post I wrote, “The second chart is of Reliance Industries. It is up by approx. 10% today. If we look at the long term chart of Reliance we can see that the stock has broken out of long term consolidation pattern. The first target for reliance is at 1600 Rs. Reliance will eventually breach 2000 and long term target for reliance stays at 2300 INR.”

Reliance Industries was trading at price of 1200 and is up by 60% since then.

Indian Markets

I accidentally deleted this post I wrote on 22nd February 2017, Hence I am pasting the screen shot from the pdf

Precious Metals

In my previous post on gold July 2, 2016, I wrote,     “

1.       We have started a long-term bull market in gold and silver.

2.        We have seen bottom prices in most of the commodities.

3.       Gold and silver will shock everyone on the way up. 

Out of these three, the second call played out and we saw that most of the commodity including crude oil bottomed out in February 2016 – July 2016. The other two did not play out as expected. Almost 18 months later gold is still trading at the same prices and looks stagnant.

Although the bull market in gold started in January 2016 and is now two years old, it had failed to create any excitement as the bull market. One of the reason was that the price movement was noting near to spectacular. However, in last two years gold has appreciated by approximately  11% per annum which not bad. We can see the two years of the gold bull market in the yearly chart.

          

If we look at the daily chart of gold, we can clearly see time correction playing out. Since gold made a bottom in 2012 it had been almost 5 years since gold prices have been consolidating at these levels. If we look at long-term structure of gold (in the yearly chart) gold had a 10X rally from 2001 – 2011 and since then it fell by 50% (price correction). So gold has completed its price correction and time correction.

Look at the given chart I don’t see any reason why gold will not break out from these levels and surprise everyone on the upside. 

Similarly, if we look at silver, it is just waiting for the second breakout above 20$, once its above that long-term targets for silver can be anywhere between 35 -50 USD and beyond.

Summary:

1.       Once gold breakout above 1350 -1400 levels there should be a up move to 1800 – 2400 levels.

2.       The breakout in gold is imminent. I see the probability of more than 90%

3.       Silver will also do well once it trades above 20$, target stays at 35 to 50$