U.S. Market Has A Bearish Signal For Indian Equities

The divergence in returns by the U.S. and Indian markets is at its widest in five years. Going by history, that suggests turbulence for the domestic market ahead.

Indian indices peaked in September, a month before the U.S. stocks, but didn't fall even as equities declined in the American market.

Note: The values are as of Dec. 20.

Since mid-November, S&P 500 Index plummeted 10 percent while India's Nifty 50 rose 4 percent during the period. That caused India VIX, a measure of volatility, to cool 11 percent while the U.S. fear gauge surged 40 percent. In fact, the benchmark measure of expected volatility in U.S. stocks is trading higher than the usually rockier Indian counterpart.

The gap between the two is more than three standard deviations, the second-widest in five years—a level that has been a precursor to a crash.

The spread was higher in February 2018 when S&P 500 tumbled around 8 percent. That triggered a 25 percent spike in India VIX in a day before it cooled as the Nifty 50 decline more than 4 percent.

The current divergence in volatility is comparable with August 2015 when China's Black Monday rattled the global markets as S&P 500 Index tumbled more than 10 percent in five days. The Indian benchmark fell around 8 percent, causing volatility to spike 55 percent. The spread went up sharply from -2.50 to 12.60 in a week then.

The Golden Cross

And volatility in the U.S. isn't coming down soon. The 50-week moving average of U.S. volatility has crossed the 200-week reading. The pattern, called golden cross, signals that the index will continue to rise. When volatility spikes, prices tend to go down.

Since 2001, asset prices have fallen on each of the four occasions when VIX formed the golden cross in the U.S. And that triggered a slide in global equities as well.