Morgan Stanley, in its latest 2012 market outlook, has made a reference to a ?golden cross?, saying the Indian market?s absolute valuations have turned compelling, while relative valuations have dipped below their 2008-09 lows.
With markets trading at a multiple of 12.5 times forward earnings, hopes that the recent rally will turn into a strong rebound towards 5,300 have increased. ?However, much would depend on the Nifty?s behaviour around its 200 DMA, which it fell below in early May,? say market players.
The historical relative movement between the short-term and long-term market indicators, the Nifty’s 50 and 200 DMAs (Day Moving Averages), has acted as an event highlighting change in the market trends. The recent positive cross-over has raised hopes that market could well be at a turning point given the attractive valuations.
However, if the fading gap between the two indicators since the first week of June turns into a negative cross-over, these hopes may not materialise. Players say that would also decide the fate of the cross-over between the Nifty?s 50 and 200 DMA, which usually precedes major market turn-around.
Generally, the relative position of the short-term moving average (50 DMA) with respect to the long-term moving average ( 200 DMA) indicates the underlying tone of the market. The trend is considered bullish if the momentum in the market pushes its 50DMA to quote above its 200 DMA (positive cross-over) and bearish when it is trading below this pointer (negative cross-over).
In early March, the market momentum pushed the Nifty?s 50 DMA above its 200 DMA and the gap between two indicators continued to widen. However since the last week of April, as the Nifty began its slide below the 5,100 mark, this gap has continued to narrow and currently stands at about 20 points.
As can be seen from the chart, on more than one occasion, the cross-over between the Nifty?s 50 and 200 DMAs has substantiated a change in the market trend. For example, in October 2004, the positive cross-over between the two moving averages confirmed the strength in underlying up-trend that lasted till January 2008. During this period, the strength of this cross-over was tested at least three times as the gap between the 50 and 200 DMAs narrowed with the market corrections of April 2005, May 2006 and March 2007.
Similarly, during the bear market of 2008, the market fall intensified in April 2008, after a negative cross-over between the indicators emerged in late March.