India's Stock Market: Currently Momentum-Driven Not Contrarian-Driven

This post was inspired by reader Soham Das (author of the Jump Up blog) who asked us to confirm his findings that in the short-term, the Indian stock market behaves opposite of the US market: it is momentum, not contrarian, driven.

A simple illustration…

(Click to enlarge)

The graph above shows the results of two trading strategies: One going long India’s S&P CNX Nifty index at today’s close if the market closed up today (green) and the other if it closed down (red), from 06/1995. Geek note: this is a proof of concept, so these results are frictionless (i.e. do not account for transaction fees or slippage).

Obviously, the Indian market demonstrates tremendous daily follow-through, or put another way, up days tend to be followed by up days, and vice-versa. But recall that this is the exact opposite of what we see in the U.S. stock market today (read more).

Compare that chart to the much longer test of the U.S. market from 1950 below.

(Click to enlarge)

Note how prior to about 2000, the U.S. market also demonstrated positive daily follow-through, but right around the turn of the century (grey dotted line), it flipped contrarian. Up days now tend to be followed by down days, and vice-versa.

India’s short-term momentum is seen in other indicators as well, such as RSI(2). Unlike the US markets, in India, high RSI(2) readings tend to be bullish, while low readings tend to be bearish.

I’m not sure (yet) how a U.S. based trader such as myself would best take advantage of this observation, but it’s interesting that in these interconnected financial markets, another of the world’s majors would behave so very differently.

Comments

[Henry Buttal]

Thanks to you and Soham Das for this very interesting observation. I think information on international markets is important, especially now. I have ADRs, but have always believed that the depository receipt correlation with US markets was to high to be a really effective diversification.

2009 Jun 09 12:03 PM

[Old Trader]

Henry,

An interesting observation about a too close correlation of ADRs to the overall US market. There's probably some truth to your theory, insofar as a down market will tend to weigh on all stocks, and vice versa. Of course, the alternative is to use the pink sheets, or the OTC-BB, leaving one open to wide spreads between bid and ask. Having said that, if one has a longer time horizon (i.e. is not attempting to day-trade), its not that big a deal, I'd think. I've got about 35% of my portfolio in foreign equities, and big chunk in global sovereign debt, on the fixed income side of things. Both are play against long-term dollar weakness, as well as out-performance in foreign markets, compared to the US.


On Jun 09 12:03 PM Henry Buttal wrote:

> Thanks to you and Soham Das for this very interesting observation.
> I think information on international markets is important, especially
> now. I have ADRs, but have always believed that the depository receipt
> correlation with US markets was to high to be a really effective
> diversification.

2009 Jun 09 02:23 PM

[Henry Buttal]

Old Trader,

Thanks for the feedback. You have just described the portfolio structure I have been moving to post October 08. I have mostly international equities, a lot still in ADRs, but the greater diversity of ETFs and ETN holding foreign instruments has allowed.

I have started to pick up a little foreign debt, and have begun looking at offshore funds that might be worth adding as diversification.

With apologies to C&W singer Alan Jackson------- "Its a bull market somewhere!!!"

2009 Jun 09 11:05 PM