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Is the worst over for Indian markets?

Saturday, April 26, 2008 Leave a comment Go to comments

Today’s move might have taken a few bears by surprise and now everybody is trying to know if this is a “resumption of long term uptrend ” or just a “bear market rally”.

Let me throw some data at you and see what we come up with.(Rather than a mere guess!)

A close analysis of past market cycles(about 15 years) might provide some answers( with the benefit of hindsight). This might be useful for people who have just seen the 2003-2007 period in the markets.

  • Dec 1994-Jan 1996: Nifty fell from 1250 levels to 810. A drop of almost 35% in 12 months. The intermediate rallies were never more than 10-15%. So it was a clean downtrend.
  • Jan 1996- June 1996: NIFTY rose from 810 to 1200 levels in 6 Months. A gain of almost 50% in 6 months. Intermediate corrections of not more than 15% are observed.What needs to be observed here is that market failed to take out the previous market high of 1250. So this might have counted as bear rally for many market participants.
  • July 1996- Dec 1996: NIFTY fell from 1200 levels to 780 odd levels- a drop of almost 35%. The in between rallies were never more than 10-15%. So it was a clean downtrend.
  • Dec 1996 – Aug 1997:NIFTY rose from 780 levels to 1300 levels. A again of almost 80% in 8 months with deepest correction of about 30%. This time market took out previous high of 1200 and 1250 but it turned out to be failed break out.
  • Aug 97 -Feb 98: NIFTY fell from a high of 1300 to 940. A drop of almost 28%. The bear market rallies were again limited to 10-12% range with one or two rallies giving close to 20%.
  • Feb 1998- April 1998– NIFTY went from 930 to 1250. A gain of 35% with no significant corrections.
  • April 1998- Dec 1998– NIFTY fell from 1250 to low of 800. Again a 30-35% fall.
  • Dec 1998- Feb 2000 – This was the IT/dotcom mania. The markets rose from 800 to 1800 in almost 1 year. A gain of 125% with intermediate corrections of not more than 20%.
  • Feb 2000-Sept 2001- This was the last bear market we had in our markets. NIFTY fell from a high of 1800 to a low of 850 (53% fall) in 18 months with intermediate rallies of 25%.
  • Sept 2001- Feb 2002– NIFTY rose from 850 to 1200 levels again in 6 months. Almost 30% gain.One can consider this as part of bear rally.
  • Feb 2002-April 2003– A fall back to 920 levels from 1200 levels. A loss of 25% with intermediate bear rallies giving as much as 20% on the upside.
  • April 2003 – Jan 2004– Beginning of current bull run. NIFTY went from 920 to 2000 levels. A gain of 100%+ with intermediate corrections of not more than 10%. A clean uptrend.
  • Jan 2004-May 2004- NIFTY fell from 2000 to 1300 levels. A fall of 35%. A swift correction!
  • May 2004 -May 2006- NIFTY went from 1300 to 3750 levels. A gain of 190% with intermediate corrections of not more than 10-12%.
  • May 2006-Jun 2006- NIFTY fell from 3750 to 2600 levels.A loss of 30%. A swift correction!
  • June 2006-Jan 2008- NIFTY went from 2600 to 6350 levels. A gain of 145% with intermediate corrections of not more than 20%.
  • Jan 2008 – Present- Nifty fell from 6350 to 4450 levels. A loss of 30%. Bull market correction? Bear market? What?

Can we draw any conclusions from the above data? It is a little difficult but let me give it a shot.

Bull Markets:

Bull markets look a lot more simpler.They usually give more than 50% from the bottom.

Normal bull market corrections are not more than 15-20%.

In case the corrections exceed 30-35%, they are usually a swift ones (May 2004,May 2006).

And most important of them all, in a bull market markets take out the previous highs!

Bear Markets:

They are much more tricky.

From the past data it looks like bear markets are much more painful and markets fall more than 35% from top. Before 2000-2001, many of the downtrends gave a 30-35% downfall.(may be because markets were in a range) Only in 2001 did we fall more (55%).

Also bear markets rallies can extend up to 25% with 15% being the average.

Coming to present situation:

Before we begin ,one more thing one should notice is that “Future is never exactly like the past”. Before the current bull run, we had not seen gains of 188% in a single upmove! Similarly, markets can easily fall more than 55% in bearish conditions.

This is all about working on some probabilities. And hence the reason to manage risk.

Does it look more like 2000-2001 or May 2004 or 1995-96?

Right now we have had 30% correction on top. This certainly means that we might still NOT be in a bear market. Also as the correction was again swift, I won’t call this a bear market yet.

Does that mean that we are in a bullish zone? Again till we take out the previous high of 6350(a distinct characteristic all of the previous bull markets), one can’t say that we are in clear uptrend.

So as of now, this looks more like the 4450 to 6350 zone kind of market. Theoretically this is a big zone to play with-almost 35-40% in between.

So if we break 6350 on the upside with the current uptrend, the current rally shall be termed as a bull market correction while if we break 4450, the current upmove shall be construed as a bear rally. Even if this is a bear rally, this can extend almost 30-35% from the bottom. But,one needs to be less aggressive in his/her approach till we are sure.

Carefully observe the 1995-1998 period market moves(many 30-35% moves on the upside and the downside with an average of 6 month duration) and not just look at 2003-2007 period.

My own sense is that the current upmove might surprise many participants. The answer lies in the investor psychology. Many players have been hit hard (big and small) and they won’t dare to venture again. Smart players who have the capital and who were quick to react last time have the courage and the capital to make the best of the current uptrend.

One can position himself keeping these facts in mind. Don’t go after various definitions of bull and bear markets. If you are still listening to TV experts, it time to stop listening to these “equity strategists”. Just know what your risks are and then decide to play this market from the long/short side.

Please let me know if you can draw any other conclusions.

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  1. sagecapital
    Saturday, May 3, 2008 at 11:07 am

    Thats true ..
    I am having my fair share of friends and critics..
    I am glad to hear that Rohit had benefited immensely from my blog. Talk of making some difference!
    Of course I can’t touch as many lives as CNBC does 😉

  2. Ravi
    Friday, May 2, 2008 at 10:58 am

    Dear sage

    Look after Rohit well.You won’t find a better friend and Good friends are like good books-
    A perpetual delight. (Tirukkural :783)

    Ravi

  3. sagecapital
    Friday, May 2, 2008 at 8:49 am

    Anil- Your observation is correct. For booking profits, you just need to call your broker or watch the market and sell it.
    Actually you can try placing “limit orders” which might work.(but this might be treated as a new order, so if that gets filled, you need to cancel your stop loss).

  4. anil bansal
    Thursday, May 1, 2008 at 4:13 pm

    Sage,
    Most of the exchanges provide for a stop loss order. But strangely enough a book profit order is missing. In a stop loss order if the prices fall below a certain price the exchange puts that oder for sale. By a book profit order I mean that the sell order is placed in the market when the price rise above target price.
    Quite evident the exchange software designers want the investors to loose money be it in the the form of 1-2% stop loss. This itself would amount to huge sums of profits for the operators.

  5. Rohit
    Tuesday, April 29, 2008 at 8:53 pm

    Ravi,

    I agree with you that the post is not straight forward.
    But If you had spent more time reading and trying to understand the post then you would have got what sage meant instead of trying to find the loopholes or finding ways to make fun of sage or myself.

    Coming to me I am keeping an eye on the Index but not too worried about it. I am trading the range as mentioned in the above post. I pick a range for a stock and trade it. If the stock moves beyond the range I will ride it.

    If the market reverses I will get out with small loss but in profit on the whole. I have made 20-30% in the last 1 month trading ABAN, RPL, HDFC, Glenmark, IFCI, KLG SYSTEL, Godawari Power etc. Now these stocks are not recommended by sage in the blog in the last 1 month. But sage’s posts helped me in trading these stocks.

    Many ppl would have sold off the stocks yesterday in anticipation of the RBI meeting. But yesterday’s market action was not telling that. (One trader who was interviewed in Market Wizards told the same. If we are worried about a stock thinking it might fall but if the market action doesn’t confirm it then it is better you hold the stock. There is a high probability that this stock can go up). Thank you sage for mentioning this book in the reading section.

    So I held on to them. HDFC, Glenmark, KLG Systel moved up very nicely today. Tomorrow they may crash.
    I will get out of them.

    So dear Ravi.. instead of fighting with one another we both will try to benefit from his posts. If we have any confusion we will ask Sage only here and he will reply to it. You did a very good thing by asking in this post and he cleared the doubt.

    Happy trading.

    Regards,
    Rohit

  6. sagecapital
    Tuesday, April 29, 2008 at 5:33 pm

    I think you missed the point.Things are simple and yet not simple. Do you understand that trading is about “probability” and not “accurate predictions”?
    Just check out the characteristics of a bull market-we always take out the previous highs. So till that happens, we can’t say if this is a bear market rally or continuation of uptrend.(Again we had an exception in Jan-July 1997 when we fell even after breaking out the previous high)
    Secondly, bear rallies can go up to 20% from the bottom(as evident in 2000-2001), so even if we reach 5400 on NIFTY and then fall down sharply,the current up move shall be part of bear market rally. Above 5400, one might feel more confident of 6000+ levels.
    When I say that “current move can surprise many people”, I mean that most of the street is still not believing this current rally and might short it. So there is a very good probability that we go beyond 5400 and may be take a dash at previous highs!(coz that will bring the maximum surprise)
    Please note that this is a LIKELY SCENARIO and not the ONLY possibility. As a trader, you job is to work out a few scenarios, assign a few probabilities to them and then take positions accordingly. And most important, if your analysis turns out to be wrong, you just get out with small losses.
    The intent of this post is not to “predict” but be aware of different possibilities. That might increase your chances of making money.

  7. Ravi
    Tuesday, April 29, 2008 at 5:13 pm

    Hi Sage

    You are a master of obfuscation. Are we in a bull or a bear phase? When you say that the current upmove may surprise many participants what do you mean? That if the market moves up you can say that you told us. And if it moves down, you can say that again.

    You should be a politician as you have all your flanks covered.

    Rohit should read this post.

    Ravi

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