Hunting with the Indians (DJIA, EPI)

Hunting with the Indians (DJIA, EPI)

This is the time of year that speaks most directly to the need for renewal and regeneration.

Yes, in most parts of the country fall is beginning (winter in some locales!) and the leaves are turning, so for many the feeling may be more one of nostalgia and conservation than revolution. But we hold to the doctrine that everything must be renewed regularly, so any retrenching and holding on to past notions and habits is, in our eyes, a recipe for stagnation, rather than a proper conservativism.

And where do we find the mood for change most starkly exhibited today? Quite clearly, it’s in the run-up to this November’s elections, where the possibility of a Republican takeover of the Senate is looming as a distinct possibility.

For those who hold by the status quo, or who would prefer to see the Democrats up their gains in government, if course, this stands as a disaster in the waiting. But for much of Wall Street and many investors beyond the NYSE trading floor, the sounds of elephants on the march will likely be greeted with an equally thunderous applause.

Why? Because the common belief is that Republicans are good for business and growth, and with both chambers controlled by those monetary whiz-kids, we should expect the economy and the market to take flight as they never did before.

Or maybe once.

djia

There’s one fairly recent precedent for Republicans gaining complete control over congress during a Democratic presidency. It happened in 1994, during the so-called Republican Revolution, when a Newt Gingrich-led coup of GOP firebrands added 54 seats in the House of Representatives and another eight in the Senate.

And a revolution it was, for the Republicans hadn’t held a majority in the House since 1952. They also captured 20 state legislatures from the Democrats at that time.

And as the above chart points out quite clearly, that revolution performed quite a trick on the Dow.

What had been a smooth and steady rise from the 1987 crash through the fall of 1994, turned into a G-induced lurch heavenward with Dr. Gingrich’s Contract with America.

cher

No, no, my dearest photoshopped princess, we’re not cheerleaders for anyone here.

Just wanted to point out the way the market responds to certain political reconfigurations and to keep our eyes peeled to the horizon for potential game-changing events that might catalyze a markets, and we see the upcoming vote in November as one such possibility.

Our advice is simply to be in the market before that time if you’re not already – or at the very least to take advantage of any near term weakness to add to your current long positions.

How much of a chance do you give to a second revolution this fall?

 

According to the New York Times’ poll simulator, “Republicans have a slight edge, with about a 61% chance of gaining a majority.” Other pollsters rate the chances higher. We don’t operate a polling operation, but we can say that if the market does nothing spectacular in either direction before the public votes in November, the Democrats will fare better than they would in the event of a drop in the indexes. So, too, if the market climbs dramatically between now and then, the GOP will have less of a chance of securing both chambers.

In short, it all depends on the direction of the Dow.

‘Nuff said.

Let’s turn our attention to other markets for a moment, where we also see chances of regeneration and the potential for some lucrative trades.

We’ll begin in the east, with a glance at the Indian market for the last six months.

epi

This is the Wisdom Tree India Earnings Fund (NYSE:EPI), the most popular of the India ETFs with $100 million traded daily, on average.

What’s key here is the pause that has emerged after an election-induced pop in May sent the index higher by nearly 25% in just a month.

The resultant pattern is called a ‘flag’ (red lines at top) – it’s considered a continuation pattern by chartists, so it’s good news for the bulls. Any break above the upper boundary of the flag with accompanying volume would be a clear sign to traders that India was again on the move, and the buying on the Sensex would likely begin in earnest.

charles

But the sideways slide also assisted the stock’s technical standing, as it had gotten way too frothy upon new Prime Minister Narendra Modi’s economic revitalization platform becoming economic law in India.

How?

1. First, the key 137 day moving average had time to catch up to the price action deep red line at $20.75).
2. Second, RSI and MACD indicators successfully worked off their overbought conditions first manifest back in mid-May (in black).
3. And third, those same indicators, after evincing signs of divergence for three months, have now turned higher and are showing a healthy underlying bullishness (black and blue).

All that remains is for price, which is now butting up against overhead resistance at $23.50, to punch through that level, and we’ll be away to the races.

India now the World’s Third Largest Economy

 

There are growing signs that the Indian economy is starting to return to itself, with industrial production already ramping up for several months now and a limited number of infrastructure projects back in play thanks to the government’s new initiatives.

All told, Indian growth should run anywhere between 5.3 to 5.5% this year and next, making for a potentially solid bout of gains for the Indian market, too.

We note, too, that India appears to have her banking act together, unlike a number of her economic megalith friends.

Take a look here –

globalrisk

While Europe and Japan lead the west’s circus of potential financial folly, Indian banks seem appear to be sufficiently capitalized to carry through another Lehman style 2008 market crash with a minimum of disturbance.

And that, too, builds confidence.

We’re Buying India

 

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The best way to play the continuing Indian bull story is to buy CALLs above the flag and sell PUTs below.

And that’s what we’re doing.

Wall Street Elite recommends you consider buying the EPI January 24 CALL for $0.90 and selling the EPI January 21 PUT for $0.30. Total debit for the trade is $0.60.
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[mepr-rule id=”988″ ifallowed=”show” description=”executive_lounge_members_only”]
The best way to play the continuing Indian bull story is to buy CALLs above the flag and sell PUTs below.

And that’s what we’re doing.

Wall Street Elite recommends you consider buying the EPI January 24 CALL for $0.90 and selling the EPI January 21 PUT for $0.30. Total debit for the trade is $0.60.
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With kind regards,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

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