Economic fundamentals indicate that we are probably near bottom of cycle, however leading indictors of recovery are still not in sight.
Typically market itself are the best indicators of recovery and tend to breakout from their bottoms many months before a economic recovery can finally be confirmed.
However there do seem to be a few macro variables which tend to act as a leading indicator for a market breakout itself.
The analysis is based on how the recovery and market breakout progressed during the 2008 crisis, and on otherwise well known relationships between some of these variables.
The primary indicators are
Quarterly profit growth
An improvement in YOY percentage of net profit would point to an impending breakout in a few months. And the first time that quarterly profits show a positive growth (even if sales growth is negative) after a period of de-growth, the breakout would have just happened or about to happen.
WPI inflation less than 5% would point to an impending breakout within a month or two.
Given that the Sept’11 quarter net profit profit showed a decline of around 23% YOY and Nov WPI Inflation is at 9.1%, we seem to more than a few months away from a decisive breakout.
There are a few other indicators which can probably be used as more of confirmatory indicators rather than primary indicator due to reasons of volatility/ data reliability /variable being a decision of a person (e.g rate hike)
These are :-
- YOY percentage change in IIP to show improvement (even if means a lower negative number). Breakout likely to happen almost immediately .
- Commodity price indexes would make new lows and start to rise just prior to breakout
- US Govt 10 year yields would form a bottom a start to rise. The rise in the 10 year yields would precede the breakout in S&P 500 in US. And I am assuming that we need to see some kind of breakout in S&P 500 for the breakout in domestic equities to sustain
- Advance tax estimates of top 100 companies likely to show an uptick a month or two before breakout
- FII monthly outflows to slow down compared to immediately preceding six months. This one is very volatile and FII’s have not been been as bearish as in 2008 period, so I would use this with a pinch of salt.
- Gold likely to correct 15-20% from its 52 week highs a few months before breakout
- RBI would have cut rates substantially
- Surprisingly, Non food credit and Exports growth do not show any clear relationship to a market breakout and in fact keep on deteriorating even as market makes higher tops.
If time permits, I will try and post detailed analysis around each of these variables separately and also some of my findings around the chronology of these events.