Since hitting record highs back in March of 2015, the Indian Bombay 30 (also referred to as the SENSEX 30 or BSE 30) equity benchmark has been on a steady retreat after entering a bear market back in January of this year.  With global conditions continuing to deteriorate, the developments in the BSE 30 have mirrored changes in other emerging markets. As interest rates rise, investors are abandoning the yields available in emerging markets in favor of quality assets like US Treasuries, leading to outflows from the equities of developing countries. The BSE 30 has felt these flows, with both domestic and foreign investors pulling and reallocating funds that were previously in stocks. More momentum in the dollar combined with the possibility of two or more hikes during 2016 could increase the pace of these outflows, hurting any chance of a near-term recovery in the BSE 30.

Fundamentally Speaking

Performance in the BSE 30 has been particularly weak over the last 52-weeks, with the benchmark sliding by -9.50% due to the drag from natural resources companies that have borne the brunt of the retrenchment in global economic activity. During the same time period, only 9 out of the 30 index constituents have produced positive returns as investors dump equities and commodities in favor of other assets. Although domestically, the Indian economy is showing stellar growth metrics, with GDP climbing at a 7.30% annualized pace and unemployment under control, external conditions have weighed on heavily on the economy, specifically the weakness in the Rupee which has been a contributor to higher inflation.  Nevertheless, the real story in emerging markets continues to be the outflows from both domestic and foreign investors thanks to the changing monetary policy backdrop in the United States.

(Click on image to enlarge)

Although conventional wisdom dictates that a depreciating currency is positive for stocks, especially those with a global footprint, for emerging markets, this line of reasoning does not hold. For one, the rising dollar and monetary tightening in the United States is draining dollars from the financial system, a factor that is particularly detrimental for emerging markets that depend on the US dollar to facilitate trade. During the past 52-weeks, the Rupee has fallen by -6.20% versus the dollar and -1.82% year-to-date, underlining this point. Looking at the correlation coefficient, the relationship between the USDINR pair is historically inverse, meaning that weakness in Rupee translates to softness in the BSE 30. While the correlation coefficient between the Indian Rupee and Sensex 30 has actually neared zero, printing at 0.20 versus the 0.96 that was reported back in March due to evolving conditions, the relationship could revert quickly, contributing to renewed pressure on the index.

Technical Speaking

Looking at the technical factors guiding the price action in the BSE Sensex 30, it is important to remember the prevailing bear market that the index entered back in January amid heightened outflows from emerging market assets. Confirming the bearish bias is the 200-day moving average which is currently trending lower above the SENSEX 30 and acting as resistance against any renewed momentum higher. While the 50-day moving average has turned higher, acting as support for the index, should prices break below, it could pave the way for further losses in in Sensex. Nevertheless, even with the bearish bias, there are some indications that the index might be poised to turn higher and rebound over the medium-term after the emergence of several bullish signals.

(Click on image to enlarge)

Aside from the 50-day moving average, the breakout higher from the multi-month channel lower back in early March has given credence to the idea that the BSE 30 is experiencing a technical pullback to the upside. Should the 50-day moving average cross the 200-day moving average to the upside, it could add to the prospect of additional near-term gains in the index. Adding to the near-term bullishness is also the appearance of a head and shoulders bullish pattern. The key level to watch is the shoulder line at support of 24860. For the formation to hold, the price action must bounce off this level back towards the neck line at resistance of 26200. A move above resistance would be indicative of a breakout higher, adding to the technical reversal momentum. However, should prices fall below the shoulder line, it may signal a further decline in the BSE 200.

(Click on image to enlarge)

Going Forward

There are numerous factors that could impact forward-looking performance for the BSE 30. For one, earnings announcements are going to be abundant over the coming weeks for index components. Although the weaker Rupee might help profits for companies that are dependent on the export economy, the pullback in global economic activity could see results disappoint. Outside of performance, if the correlation between the Rupee and BSE 30 returns to conditions experienced over the last several years, it implies that any renewed upwards momentum in the USDINR pair is likely to drag on the BSE 30. As such, any further tightening from the US Federal Reserve and decline in liquidity conditions will hurt the index going forward. Although technical factors are mixed, indicators are pointing towards a near-term rebound despite the medium-term developments that will continue to weigh on performance.