Economic Paradigm Shift

The USDINR deserves a mention especially as RBI did the unexpected, or should I say widely expected, leave interest rates alone. After promising to keep policy accommodative the prime objective of the RBI in recent years has been to bring down interest rates to the point that it stimulates demand for credit. In doing so this year it has gone as far as to ignore inflation altogether. That is the surprise element. Now I did expect that food inflation will come down a bit after December due to the new produce hitting the market. That may have created some room for RBI to cut rates. But RBIs own projections have raised the CPI data expectations for the next quarter. In other words, keeping rates where they are amount to a policy of negative real interest rates. And they are clear they want to focus on growth so this policy won't change. What this means for stocks and currency markets is tricky. The policy is pro liquidity and is bearish for the INR, no surprise that the USDINR stopped making new lows from September onward. My sense is that it sets the stage for wave E up toward 78 in the coming year for the USDINR. In the near term, however, the RBI stance will boost stocks as they read the liquidity injection as bullish. We have a case for USDINR and Nifty rising together then. This is a mirage of what they did in 2011 in the post-2009 stimulus era that drove inflation to double digits. Food inflation was elevated [18%] in 2011 but RBI reluctantly only raised rates by 25 basis points spurring a blow-off rally in stocks for an entire month before the market topped. Now that somewhat explains why the market rallied today and may continue to. USDINR on the other hand may continue to build a support base at the bottom end of its long-term trading range, ignoring the relentless decline of the US dollar index in overseas markets.

Dow Jones

The DJI could have pulled back in wave II to the lower band but did not want to. The best alternative then is to expect an extended wave 1 of a new impulse higher and we may be starting III of 1 upward now.

Russel 2000

An all-time high for the small-cap index in an ongoing 3rd wave. This is wave 3 of a larger wave 3 circle.  The larger degree 3=1 is way higher at 2386. With wave 3 extending it is hard to say where the wave 4 correction will kick in.

A Megaphone in US Indices

Has the Dow Jones Industrials average formed an expanding triangle? AKA - Jaws of Death - AKA - Megaphone pattern? Both yes and No. 

The first time the above terminology was used it was to describe the bigger picture in the DJIA from the year 2000 to 2016, I tried it too and we know how that went. Trumps' elections and following tax cuts extended that wave E into an impulse wave bull market. Now 2000-2009 is best marked as an expanded flat in a larger degree 4th wave [blue markings] and the rally from there as the 5th wave at Supercycle degree.

With that let us bring our focus to the current phase of the market, the volatile pattern seen from 2018 to date. Initially, 2018-2020 looked like an expanding triangle and if it was a topping pattern the 2020 crash should not have been followed by a new high in the market. That forces us to redraw the expanding pattern to include the new information. This week however on the weekly chart below ew close above the top line of the expanding pattern. Now we can go on marking this rise as a throw over in an a-b-c of E but even than a parallel line for C of E means we have a long way up to go maybe. The S&P weekly chart below projects the channel to 4500.

The better option however given the news events that have surrounded this pattern may be to mark the expanding triangle in the bottom in 2020 as wave 4 and mark the advance in the markets we are seeing now as wave 5. In that, we are in 3 of 5 and when 5 of 5 is over you can try calling the end of the bubble. Bubbles have this nature of getting out of hand to a degree that no one can relate to it. Eventually, new ways to justify this trend will be found and it will all look reasonable. But the one tool that will blindly allow you to capture the entire bubble and profit from it is the Elliott wave structure itself if we get it right. Note the events that have surrounded this pattern, we went from trying to raise interest rates to put them back at zero, then following it up with Swap lines and unlimited QE on every Sneeze and direct intervention in the Repo market. Whether we get CPI inflation or not we are going on with Asset Price inflation till corporate debt becomes public debt and a new credit cycle can start again. What will prick this one? We will all know after 5 waves end, but often before it, stories will emerge if you are paying attention. The housing bubble in 2008 had technically popped in 2007 but everyone chose to ignore it, except....yeah a few hedge funds. Stay tuned. The Pandemic is the excuse for central banks around the world including India to go for negative real interest rates and that is liquidity infusion in its most green color. The impact on asset prices is direct. Welcome to Hyperbubble, deal with it.