The second piece of wisdom is from Wall Street “When all the wise men think alike about the markets, the markets plan otherwise.” That once again seems to be the case this time around. COVID 2.0 had raised concerns over future growth, government debt, rising fiscal deficit and pressure of rising input costs. The Sensex has chosen to brush aside all these concerns and resume its upward journey.
How the Sensex journeyed to 52,000?
The Sensex gained 6.51% in the month of May-21 as the graph below depicts and the rally has continued in June too. The journey to 52,000 appeared almost decisive in the second half of May.
5 Macro stories that drove Sensex to 52,000
Let us look at 5 macro positives that actually drove the markets higher and the Sensex to 52,000 levels.
a) COVID 2.0 may not be under control but the numbers are surely improving. Daily afflictions are down in the last one month from above 4 lakhs to below 1.50 lakhs. That is a huge turnaround, despite opening up concerns remaining.
b) The government revenues were robust with GST collections crossing Rs1 trillion in the last 6 months in succession. The impact is visible in the fact that the fiscal deficit for FY21 ended at 9.2% against the target of 9.5%.
c) Quarterly results are a lot better than expected. The general view was that YOY profit growth would be good but sequential profit growth would be flat to negative. The Q4 has belied these notions and shown solid 15.2% growth in profits on sequential basis.
d) Inflation is down sharply and what is more important is that it is close to the RBI target of 4% headline inflation. Above all, one big concern was core inflation, which has also tapered substantially in the last one month.
e) FPI flows have shown a turnaround since mid-May and after a negative April, FPI flows were mildly positive in May. This is in contrast to what is happening to Asian EMs and it implies FPIs are impressed by GDP pullback, Q4 performance and tapering COVID 2.0.
Finally, a quick word on the Conviction ratio
Before we get to seeing the graphical presentation of the Conviction Ratio, let us quickly look at what this market conviction ratio is all about. Two very important ratios that measure the breadth of any rally are the A/D ratio and the 52 Week High/Low ratio. When you combine these two ratios i.e. (52-week High/Low Ratio divided by A/D ratio) you get the conviction ratio. Let us look at how the conviction ratio has panned out.
Don’t bother too much about the vagaries in the ratio, there are two things that you need to focus on here. Firstly, the A/D ratio must be above 1 on most of the trading days. In the last 1 month, there were only 3 occasions on which the A/D ratio was below 1. Secondly, once the condition of A/D ratio is satisfied, look at the trend of the Conviction Ratio as captured by the dotted red trend line. The trend line is clearly rising hinting at rising conviction in the market. At the end of the day Sensex at 52,000 is the story of this underlying conviction in the market.