Indian market rally has minimal headwinds

Its ascent will be unabated save for a few correctional speed bumps, says Morgan Stanley.

The brokerage firm anticipates a solid rise, assuming that what the indicators are showing really is a new bull market. If not, then a sharp correction could be just around the corner.

Here's more from Morgan Stanley:

If this is a new bull market, there is little in our indicators to suggest that the end is near. We may get small corrections, but could go higher before a substantial correction emerges.

Pace of rise: At 20% in nine weeks, the pace of the market’s increase is no different from the 21% average of previous bull markets.

Valuations: Our composite valuation indicator is at a neutral level. Whilst it tends to go a lot higher before markets enter a steep correction, this assumes that we are in a bull market.

Earnings revisions: Earnings revisions led the market bottom for the first time ever.

Sentiment: Our proprietary indicator is off the “strong buy” zone but remains in the “buy” zone.

Market Timing indicator: This indicator combines sentiment, valuations, and earnings revisions, and is approaching a neutral zone after the recent rally.

Technical: The daily RSI at 76 suggests the market is overbought and is a danger signal, in our view.

Key risks unchanged:

• Oil is up 28% YoY and threatening to go higher.
• Morgan Stanley’s proprietary funding stress indicator is off highs but remains vulnerable.
• Expectations of a favorable election result for the Congress Party followed by policy action have risen.

Key question remains: Is this a new bull market? We will continue to rely on a golden cross as an indicator (see The Golden Cross, dated February 14). Historically, the golden cross (50DMA crossing over the 200DMA) has preceded fundamental change and marked turns in economic cycles. At its current pace of rise in the index, the first confirmation will take place in early March. If this turns out to be a bear market rally, we may be nearing a top based on the metrics we track. Our strategy is to continue to focus on stock picking.