emerging market: EM Golden Cross hints at more upside for Dalal Street

The Golden Cross pattern formation in emerging market equities for the second time in the current year may help Indian equities to continue their outperformance. A Golden Cross occurs when the short-term moving average crosses above the long-term average. It is perceived as a bullish technical pattern.

In the latest Golden Cross, the 50-day moving average of the MSCI EM Index has reached 1,038 compared with the 200-day moving average of 1,033, according to the Bloomberg data. In March, the EM index had gained nearly 6 per cent after forming a Golden Cross pattern before topping out. The Sensex and Nifty 50 too have reported the Golden Cross formation about a fortnight ago.

The sustainability of bullishness for the EM index will depend on how tariff talks fructify between the US and China, and commentary from central banks in the developed markets on the continuation of monetary stimulus.

Usually, an outperforming market tends to attract more allocation from active and passive funds. Indian benchmark indices have outperformed the MSCI EM index — a gauge of developing nations equities in the dollar term — by 3 per cent in the past three months. For the full year, local equities are still lagging by 3 per cent. Foreign portfolio investors (FPIs) have deployed $13.3 billion so far in 2019, the highest among the EMs, excluding China, and the largest in last five years.

In addition, the percentage of Indian stocks trading above their 200-daily moving averages was 46 per cent, one of lowest in the EM universe. Besides, Nifty 50’s relative strength index (RSI) is currently 53. RSI is a measure of magnitude of the recent price change. RSI of more than 70 is considered as overbought territory, while sub-30 is oversold. Currently, there are just four stocks in the Nifty 50 which trade above 70 RSI.