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"
this market from the long/short side.
Please let me know if you can draw any other conclusions.
BigGains !!
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