Call IT the top?

TECHNICAL VIEW

Several correlated asset classes indicate that stock markets are set to peak

"Simplicity or singleness of approach is a greatly underestimated factor of market success."

These famous words of Garfield Drew are very hard to learn. It's like accepting that being a fool in markets is the first step to profit. This is because you are always alert to a market surprise and never overlook something thinking you are a genious.

A genius doesn't make money in the market, the man who accepts his foolishness can turn a better profit against all market intellect. It's something similar to another street lore which says "beating the markets is easy, beating yourself is tough".

And to add it all, we have the classic, "markets don't work on hope". Good research is not about making things complex but making them easy. This brings us in sync with what Garfield said. If you still find it unpalatable, give us a min more.

Just like Energy Vs Sensex or Gold Vs Oil, two assets from the same market or two sectors from the same economy or two trading economies can never be disconnected.

The last two columns we got cues about Indian markets topping any time in the next few weeks owing to the Energy outperformance. And since energy is also a leading indicator for market tops, along with Gold which is a crisis commodity, we have a lot cooking here in July.

Now with CNX-IT Vs Sensex ratio line also reaching an extreme we have another cue that we are heading for at least a multi month top on India.

BSE 30 has never outperformed the CNXIT since 2003. How could it? We are the tech nation, tech being a core competency. No it's not like that. Technology is an early economic cycle sector, which invariably does worse when markets are in later stage of the economic cycle.

The outperformance and underperformance is cyclical. The last two times Sensex-CNX-IT ratio reached near parity was in April 2004 and May 2006. We all know what happened, massive drawdown, which we had some one to blame on. First time, it was the collapse of the BJP and second time, the hedge fund panic.

Now, we are in July 2007 and we have reached there again. Well timing is a tough job, but it seems there's not much to indicate we can travel north from here. So if we assume we are at another inflexion point, the equity meltdown should start any time soon. Let's see.

(Mukul Pal is CEO, Orpheus Capitals, a global alternative research company)