Nomura expects stock market to correct in the coming months

Moneylife Digital Team 23 May 2013

Its proprietary indicator, NESII, or the “surprise indicator”, feels that optimism in the market has gone one step too far and a turning point could be inevitable

Nomura expects markets to trend down in the coming weeks, if its “surprise indicator” is anything to go by. According to a note sent to clients, Nomura stated: “NESII is mean reverting, which indicates a rising probability that it will start to retrace back towards zero in the coming months. A falling NESII would indicate that economic data are likely to surprise negatively, possibly because consensus expectations are now too optimistic.”

At the moment, the NESII is positive and showing extreme bullishness vis-a-vis surprise and expectations. In other words, the market is beating investors’ expectation which is driving the market upwards. Therefore, there is greater chance for disappointment in the coming weeks which could cause the market to trend downwards. It feels that a turning point in the market is inevitable, based on how much the NESII index has gone up. The note said, “The NESII has been hovering mostly in positive territory since November 2012, indicating positive surprises in activity and inflation data since then. In fact, the NESII crossed the 1 standard deviation band last week.”

It feels that prevailing optimism in the market has gone too far and markets are likely to disappoint in the coming months. According to the note, Nomura’s economic surprise index for India (NESII) captures the direction and momentum in economic data surprises in India. Historically, it has shown a strong correlation with India’s financial markets.

Nomura had conceived a new indicator known as Nomura Economic Surprise Index for India (NESII), which is used as a “tactical tool” to gauge key turning points in the stock market. “NESII is a single numerical index which crystallises the relationship between markets and economic data in India, and tracks the direction and magnitude of economic data surprises,” according to Nomura in their first report. We had analysed the report over here (http://www.moneylife.in/article/a-nomura-index-has-72-success-ratio-in-predicting-economic-drift-and-therefore-nifty/29077.html).

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