Posted by: Pradeep | January 4, 2009

Has Indian stock market bottomed out?

I found following article by Aman Dhall in ET a worth read by Indian investors.

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Here’s a word of warning on the recent spurts in the market. If you are an investor looking at making money in the long run, Dalal Street is not yet out of the woods. In fact, to the uninitiated investor, the recent highs could appear as signs of revival though they are actually what is technically termed as ‘bear market rallies’. 

A technical analysis shows that India’s equity market will stabilise from April onwards, as it is likely to bottom out in February/March this year, when it would complete a downtrend of 13-14 months. The analysis reveals how the Bombay Stock Exchange (BSE) benchmark indice, Sensex is following a classical eight year time cycle and even though we have already witnessed four sell-offs during the bear run — January 2008, March 2008, July 2008, October 2008 — the possibility of one more cannot be ruled out. During 1992-93 and later 2000-03 bear phase, Indian stock market witnessed four to five major sell-offs. 

sensex-history

A section of analysts say that there is even a possibility of Sensex dipping below 7,000 over the next three months. “In the worst case scenario, the Sensex could bottom at 6,900-7,000 levels which should approximate the 76.4% Fibonacci correction of the entire rise from September 2001 to January 2008,” Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services told SundayET. The analysis shows stark similarities of both time and price wise correction in this eight year cycle with previous ones. In the previous eight-year cycle during 1992-93, Sensex lost 56% from a high of 4,546 to touch a low of 1,980. In the next cycle, the dip was almost 58% from a high of 6,150 in 2000 to a low of 2,594 in 2001. Timewise, while the 1992 cycle completed the bear course in 12-16 months, the 2000 cycle took 19 months to hit the downcast. “Remember, in technical analysis, both time and price forecasts must be achieved. In 2008, we were sitting again on this very important cycle, which therefore has thrown up similar possibilities,” said Anup Bagchi, executive director with ICICI Securities. 

If one has a closer look, Sensex follows a broad classical pattern where in the eight-year period, it remains bullish for two to two and a half years, fairly flattish for four to four and a half years and tends to be bearish for one to one and a half years. In the bearish period, the market bends as much as 60% from the peak value. 

Mr Bagchi points out how the leading stocks of the rally during 1992 and 2000 turning points had an extremely difficult time later. “For instance, ACC, the leading stock of the 1992 bull market, remained below its highs till end of 2004. Similarly, the IT stocks, which were leaders of the 2000 rally, lost as much as 90% of their top valuations by 2003, and most are below their top levels even today,” he said. In fact, Dalal Street’s “fear gauge” India Volatility Index (VIX) is still trading in the low 40s. THE VIX indicates market will continue to trade in uncertain conditions and fluctuate over the next 30 calendar days. In 2008, while the price wise correction has been achieved to the tune of 64%, the time wise correction is yet to take place. 

Another interesting trend witnessed during the 1992 and 2000 crash was that the Indian markets made a bottom at around 57% from highs and there were numbers of bear market rallies which were initially considered as a beginning of new bull markets. 

“But right now we have crashed almost 63% from highs with no bear market rally which can be considered as a beginning of another bull market,” said D K Aggarwal, chairman and managing director of SMC Comtrade. Historical pattern shows that all major market shakeouts have been made in panic and was followed by unfortunate events such as war and scams. It remains to be seen in the context of the Indian market whether the October 2008 level (7,700) will hold good in case of another major sell-off. One must not forget that in the stock market, money is at the extremes. While it is impossible to catch tops and bottoms, analysts say that if one could attempt to make decisions near them, the returns would be phenomenal. 

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