Long oil, short auto?

The crude oil price has been stagnating and technicians have got tired labelling the oil price structure with names like ending diagonal, completed B-wave corrective and third wave down. While crude oil sits and stagnates near $80 levels, we should also remember there is a time for an asset to sleep and there is a time for it to wake up. We think oil and energy is done with sleeping and is ready to get up from its slumber.

From an inter-market perspective, oil and auto have a strong inter-market relationship. When oil sleeps, auto rejoices and vice versa. Low oil prices are good for auto manufactures. The fuel that drives us today is stagnant at the August 2005 levels.

For the time being, oil is not holding down the auto sector. The discretionary auto sector cannot become the late economic utility sector. Energy and food, the late economic drivers we need, can never be replaced by a car (the auto sector). There is always a time when auto outperforms and auto underperforms, as markets move from the early economic to the late economic sector (when oil, utilities, food, materials and pharma do better).

BSEOIL view
The Indian oil sector has been in sideways action for nearly 18 months now and prices are retesting intermediate trend channel resistances at 11,000. The daily RSI momentum is reaching 40 supports and suggests that a breakout is imminent. Performance cycles (Rieki) also turned positive at the beginning of the month and suggest a multi-week outperformance ahead. Above all this, the global positive view on crude oil (one of the worst rankings among global assets) confirms our case.

BSEAUTO view
BSEAUTO reached psychological resistances at 10,000 and the weekly RSI momentum seems to be turning back from the overbought territory. Performance cycles look topping and suggest a potential underperformance of the Indian Auto index in the next few weeks.

On one side, we have a bottoming oil sector and on the other side, a topping auto sector. This means that the long BSEOIL-short BSEAUTO pair should deliver. We illustrated here the performance cycles between these two sectors and, as you can see, it bottomed in favour of BSEOIL.

Overall market view
The recent Alpha India generated the top performers on the Indian market, using the Rieki oscillator. Siemens, Ashok Leyland, Axis Bank and Mundra Port are negative on Rieki. ITC, Union Bank and Adani Exports are also negative.

Just like the top rankers, there are worst performers (best buys, best holds). The best hold or positive performing stocks based on Orpheus numeric rankings are Suzlon, Punj Lloyd, HDIL, Tech Mahindra and Sterlite Industries. Now that we have identified the best stocks to buy and the best shorts, we are not very far from pair strategies i.e. buy the worst performers and sell the top rankers.

Our overall view on the Indian market remains up but topping. A break below the minor trend channel supports and psychological levels at 6,000 would suggest further negativity. Nifty VIX continues to outperform as anticipated and is heading to our first target at the 25 level. The Indian rupee seems to be completing an intermediate corrective structure down and continues to hold 44 supports. Above respective supports we are waiting for further weakening of INR (confirming our equity negative case).

The author works with Orpheus CAPITALS, a global alternative research firm