CYCLIC THEORY OF SHARE MARKET. Don?t expect a quick recovery? That?s the conclusion from our ?8-year? equity cycle model. The equity cycle is a lead indicator that digs into past data and throws a likely trend. To support our model?s conclusion are weakening fundamental and economic factors, which supplement the fact that a quick recovery in the Indian equity market is a far dream. Having depicted a crash in 2008 post Sensex peaking at around 22k levels, the model now shows some pain before consolidation. Both these events might occur over the next couple of years suggesting a long wait for bulls. For a small retail investor though, it?s a boon. Such investors can now get the opportunity to accumulate at regular intervals for the next boom in the Indian equity market. History: The 8th Year Itch phenomenon . The equity market was in strong hands in dec 2007and in the midst of a terrific Bull Run. There was reasoning for every irrational behaviour. No wonder a model that showcased a sharp correction was completely ignored. Also, there were just three cycles before 2008 (for which data was computed) and data was marked by home grown scams. That could have put off some investors. What was however ignored was the fact that these three 40% plus corrections occurred over 28 years (though, Sensex was officially launched in 1986, it has a base of 1978/79 and is back computed). These data points appeared strong enough to base a theory and confidence sparked from the fact that trend lines were replicated every eighth year, though the band inched higher every cycle. So, in all probability, the correction had to happen. The 40% Plus Corrections 1984 ? Riots, Assassination, Bhopal Gas Tragedy, Economic Crisis 1992 ? Harshad Mehta Scam 2000 ? Ketan Parekh Scam/Dot com bubble bust 2008 ? Sub prime meltdown And then, one fine day in January 2008, it all came raining down. Sensex tanked and within a few trading sessions lost over 25%. Since then a lot has changed, fundamentals have deteriorated and economic events worsened. The Sensex is struggling to regain lost glory. If the cycle is to be believed, the recovery may not happen as yet. There?s still some pain left. The First Hit Year Sensex High Sensex Low Decline Time 1984 410 242 -41% 1992 4467 2476 -45% 8 months 2000 5934 3590 -40% 8 months 2008 20873 14809 -30% 3 months Note: Sensex Level on closing basis. Decline may be higher if calculations are based on intra-day high/low of Sensex Recovery from the Lowest Point during the Correction Cycle Year High Lowest point Decline Time to Lowest Point Recovery to Old Top 1984 410 NA NA NA 1992 4467 2084 -53% 12 months 27 months 2000 5934 2617 -56% 19 months 46 months 2008 20873 14809 -30% Note: Sensex Level on closing basis. Decline may be higher if calculations are based on intra-day high/low of Sensex As evident from above, the corrections in every cycle were steep and fast. This was followed by a long cooling period, which could be 15-25 months. Once the base is built, the benchmark index swiftly moved up to achieve the earlier top that takes 27-46 months. At these levels, bouts of profit booking occurred from investors who believed a healthy correction was needed for markets to smoothly sail ahead. The Current Phase The 2008 cycle, in all probabilities, is the latest cycle. The benchmark index has corrected 30% odd and has witnessed some bounce back. If the cycle is to be believed, we may see some more pain in the offing ? 10% or more. The bounce back lacks strength.
You would see that once the correction started, the Sensex has made lower tops and lower bottoms. These are signs of weakness in the equity market. Weakness in the current equity market is evident ? oil issues, MTM losses, inflation concerns, fiscal deficits, and US subprime concerns among others. There is no escaping to this fact. The market knows all these and seems to have been factored such events. FIIs have already pumped out $5.6bn out of India and are reducing India Inc. ownership. The other element one could consider is the US Presidential cycle. According to the theory, the US equity market bottoms out 1.8 years into the Presidential term. And recently we have seen that Indian equity market is not decoupled with the US market. The Future India?s long term infra led growth story stays. However, we need to go through the current pain in order to witness the new Bull Run. As of now, Sensex EPS is expected to slow down. A 10-15% range would take Sensex EPS to Rs 950 valuing the market at 17 times FY09 earnings. Looking at the current market conditions, it appears expensive. All said, expect the unexpected. The equity market is a strange creature. It has a tendency to follow different paths under similar circumstances. But, one of the things investors would have learnt from the past is that emerging markets is difficult to emerge from post a fall down. So, don?t expect a quick recovery.
BigGains !!
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