Nifty below 10,000; when the bulls are away, the bears shall play

Can we say that Indian markets are in bear territory? Let us look at the Nifty chart first.

Mar 12, 2020 11:03 IST India Infoline News Service

Where are the bulls? This could be the title of a thriller on the stock markets but most traders and investors are hardly amused. After touching a high of 12,362 on January 14th, the Nifty has dipped to 9,900 translating into a fall of 19.92% in less than 2 months. Can we say that Indian markets are in bear territory?  Let us look at the Nifty chart first.

Data Source: NSE
 
One thing is clear from the above chart. The fall has been relentless and has been consistently making lower bottoms, which is not a very encouraging sign technically. Investopedia defines a bear market as a situation where the principal index has corrected more than 20% and there is extreme pessimism and negative sentiments in the market. By that definition, the Nifty is just about entering the bear market zone but developed market indices like the Dow Jones, CAC and the DAX have already entered bear territory. For a better picture, let us also look at how Sensex performed in the last 25 years.
 
Sensex: 25 years of bulls versus bears
The Sensex is a tad richer in history since it has been around for over 40 years. Just to give a long term perspective, the Sensex has grown from 100 in 1979 to 40,000 in 2019, growing 400-fold in 40 years. That translates into average annualized returns of 18% (if you add up the dividend yield also). These returns have been generated despite all the bull and bear cycles over the last 40 years. Let us look at the Sensex chart over 25 years to get a clearer picture of how markets have reacted to sharp corrections in the past.

Data Source: BSE
 
Clearly, if you begin from the tech boom of 1999-2000, there have been five major corrections that the markets have seen. Some have resulted in genuine bear markets while others have resulted in a rapid bounce. The table below captures the contours of the key Sensex crashes in the last 25 years.
 

Period of the fall

Extent of Fall in Sensex

Reason for the fall

Negative returns

Feb 2000 to Sep 2001

5600 to 2820

Technology meltdown

(-49.64%)

Dec 2007 to Mar 2009

20,600 to 8797

Sub-prime and Lehmann

(-57.30%)

Dec 2010 to Jan 2012

20,520 to 15,789

Europe crisis

(-23.06%)

Feb 2015 to Mar 2016

29,600 to 23,459

US Fed rate hike

(-20.75%)

Jan 2020 to Mar 2020

41,945 to 34,037

Coronavirus scare

(-18.85%)

Clearly, the sharp corrections in the Sensex in 2001 and 2008 where market meltdowns. It was a result of stocks in the technology, capital goods and infrastructure space at incredibly steep valuations. The subsequent corrections in the market in 2011 and 2015 saw an equally robust recovery in the markets. The big question is whether the Sensex in 2020 veers towards a full-fledged bear market or bounces back to higher levels?
 
Should you bet on a bounce back or a bear market?
  • There are five clear reasons why the Sensex fall in 2020 looks more like the recent two falls and not like the two big bear markets of 2001 and 2008. So, a quick bounce is absolutely likely in the markets.
  • The Nifty and Sensex are nowhere close to ultra-steep valuations. In 2001 and 2008,  the indices had gotten closer to 30X P/E. Sensex P/E  at around 22 currently is a lot more comfortable.
  • In the previous bear markets of 2001 and 2008, India’s forex position was a lot more vulnerable. This time around, with a forex chest of $475 billion, the RBI has the arsenal to fight any run on the rupee. That gives confidence to traders.
  • Let us not forget the hidden dividends of cheap oil for India. With Brent Crude under $35/bbl, India is expected to sharply pull down its CAD closer to 0.5%. The impact on costs and inflation is another hidden advantage.
  • Global markets tend to overestimate any pandemic and that is what has happened in the case of the Coronavirus. Honestly, the Coronavirus is nothing as devastating as the Bubonic Plague of 1665. It can and it will be brought under control.
  • The important takeaway is that traders and investors must not expect a V-shaped recovery in the market. With so much of pain already undergone, buyers will only come back gradually.
 
In the midst of the chaos in the market, what does not change is your long term financial goals and the power of SIPs to generate wealth for you. In these turbulent times, there is all the more reason to persist with SIPs to make the most of volatility.

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