What to do before they bounce back!
Mr JR Mehta, in an article published in our December 2019 issue, had suggested investors to book profit in six stocks – all of them riding high those days on the bourses and looking promising on fundamental front. It was an audacious move since many were continuously recommending a buy in those stocks and some institutions were even initiating fresh coverage. Mehta had discussed an exclusive in-house technical analysis theory which takes into account the vertical distance between current price and its 200 day simple moving average. Today the Report Card is – Out of that list Bajaj duo have tumbled big times while four stocks have seen value erosion even higher than Index. In this Special Issue, Mr JR Mehta is back with bang with his exclusive, innovative and out of the box theories yet again. – Editor
Right from January 20, 2020, almost ten weeks have passed yet the markets around the world have been giving the investors sleepless nights continuously. It has been the most awful time, not at all anticipated by the investors, in their wildest dreams. They didn’t experience anything of this sort of happenings since 2009. The only solace was that it did not happen suddenly and the element of shock was not as it should have been.
It all started in markets with relatively mild crack on the first day of the fourth week. It was January 20, 2020 and the market was hovering at around 12430 points. Upon the first crack, market was still away from the important up slanting trend line which could be drawn by joining lows of October 18, September 19 on Weekly Chart of Nifty. The second major crack came from the last week of February starting on February 24 when it broke the said support line and by the time market participants realized the intensity of that crack, the plunge that market witnessed, two weeks in a row, was just shattering. During this fall, we even witnessed one lower circuit followed by one more in following week. All these time, we saw market volatility surge from 20 to about 80 which was a rampant rise literally on Daily basis. Summing up the entire Corona crisis, Nifty has given up a whopping 39.57%, up to the low it made at around 7511 in recent time.
Before I bring on the table some interesting studies on the current situation and put my views across about what investors should do next, I would like our esteemed readers to remember my article that was published in the December 2019. (Those who have missed can still refer by visiting our website www.indianeconomyandmarket.com).
In that article, I discussed our exclusive in-house technical analysis theory; according to which, there were certain stocks suggested to book profits even though they were looking promising to others on fundamental front. Our study was about the vertical distance between current price and its 200 day simple moving average (DSMA). As clearly stated in that article, if up trending stock having the current vertical distance is higher than that of same maximum distance in the past in about 5 to 8 years then it should be considered to book profits in to. It is because, in the markets, booking profits and rotating stock gives better profits than just buying and holding them. From a list of many, we submitted few stocks with charts to book profits in to. Surprisingly, Bajaj duo which we believed should be booked a profit in to, tumbled big time to the tune of roughly 40% until now. Comparing all the stocks with December 4, 2020 price (the date we had based the article), we can see the following value erosion in comparison to Index for the same period. Evidently three stocks have seen value erosion even higher than Index.
Since we have seen a devastating fall in Nifty, we have to bring lot of studies of different dimensions, facts & Charts as given here
Another Dimension of 1st Lower Circuit of Current Fall
While market witnessed a lower circuit on Friday, March 13, a 180 degree view could lead us to see an upper circuit like move on the same very day. Here is how, actually on Friday, before our markets open, a stingy set up was already there on account of the worst fall of previous day in global markets and especially in US market due to economy fallout under the Corona threat. When our markets opened gap down for the third day of a week, due to panic and vastly due to a margin call of leveraged positions, we saw lower circuit. So actually we did not see selling from the Thursday’s close to the circuit level as it was 419 some points gap down on that day. However, soon after circuit was open, we saw sustained buying for the day. It was about 12% from the low and much of it was witnessed in 35 minutes after the circuit was opened. Thus, market did not see a sustained selling due to gap down but it did saw most of its recovery through sustained buying for the day which was worth an upper circuit like move of about 12% on Friday, March 13. Much of that move has to be attributed to the exchange of equity from weaker hands to that of stronger ones.
Facts of Fall Due to Virus Outbreaks
While everyone is fearful on account of Coronavirus and its being pandemic, literally no one is bothering to look at the facts about what happened with somewhat similar threats in the history. No one has forgotten SARS outbreak in the year 2003. As illustrated in Chart A, markets kept falling until April 2003, but it recovered sharply just in two months. Birdflu outbreak happened soon after SARS in 2004 and as can be seen from Chart B, the effects of that on markets was beating until May 2004, but recovery was gradual and steady in four months.
Chart C shows how sharply Nifty fell soon after EBOLA outbreak happened. But soon after February 2013, it took only two months to fully recover. ZICA outbreak happened in recent past and market fell until March 2015 but full recovery took not more than four months. The same can be seen in Chart D.
Current situation may sound very different, messier and much uncertain from the past but the history tells us that every outbreak finally straightens out and recovery in markets is bound to happen. For this instant it could take more time considering more damage it has caused to the world.
But do remember! That economy and markets are resilient and they rebound sooner or later!
When market carnage like this one happens and it possess the significance of this being a historical event, we have to plot a 520 Weeks SMA (Simple Moving Average) on the chart. 52 weeks is one year and 520 weeks moving average is about 10 years. Such a DECADE AVERAGE, if plotted on the lifelong Weekly Chart of Nifty, it looks like Figure 1 as follows. It is quite evident, that this line has been tested every time in the history when market saw similar plunges. In last about three times, markets tested this line after every decade. The same line is suggesting current support at 7945 kind of levels. On the week starting from March 23, 2020, markets opened on this line only, this line has been breached during that week when Nifty saw second lower circuit but the close was pretty much above the line. Looking to the fact that this is the same line, markets have tested in every major turmoil once in every decade, we have higher chances that this line should be held and at least extensive lows from here is improbable. Only time will tell that this logic is true or not but this is just a fair anticipation as can be pursued from historical data on charts.
Bull Run after Historical Falls
Bull Run has always been the case after bear moves in the market and if the same has to come after this fall, it is now time to anticipate for how long will it come for. From the attached chart of Nifty with 3 each candle being 3 months in Figure 2 below, we can see major falls since 2000 and time involved in these falls as well as recovery following it. Each shown number suggests the total candles and each candle constitutes 3 months of time. First market fall in 2000 saw the drop of 7 candles and rise of 10 candles. This was 1.42 times the period market witnessed to rise to that of fall. By considering all the descent and rise in last 20 years, we can understand that after every bear run, market sees a bull run which lasts average 3.54 times. Every time during the Bull Run, market has recovered up to its earlier high and also beyond that. Thus, we have built up 2 logics until now. First one – Market while testing the “Decade Line” has seen its low and the second one – Bull Run will be followed in about 3.54 candles because this time market fell in just 1 candle. Although, market doesn’t go by complete logic but, if at all, it were to go by this logic then from here on in 3.54 candles we should see market reaching earlier high or even higher (3.54 candles is about 11 months).
Correction or Recession
Few more facts that every market participants have to ask themselves is whether the current bear patch in the market is ‘Correction’ or ‘Recession’. Both these words are interconnected and pretty much confusing but if we consider this as a correction then it lands comfortable in our understandings but later one sound difficult. Going by the general facts mentioned in the table above, what we find: India is more of a correction case than a recession. Although, Indian market was significantly under economic slowdown, this one still is a correction. Also, studying the given facts, we can comprehend that by fixing only few fronts, our markets can definitely see better time ahead. Going by this data, everyone will not find it difficult to discover stocks and sectors because majority of the sectors and stocks, that has been in the Bull Run before, has to be mostly the same one to go again. By considering only few of the market dynamics, intelligent and informed investors can look forward to select their pool of stocks.
The Best Course of Action
By perusing above facts and figures, one should understand that this is at least not a time to get out of the stocks by booking losses. Rather this is the time to stay the course by doing some smart churning in one’s portfolio. If you are the one with cash, you are the king and you should be utilizing this opportunity. Otherwise you will be repenting some time later about how you lost a golden chance. People with the cash should not indulge in to finding the bottom but should use the approach of average buying at regular interval of good stocks for next two months. Remember that you do not misunderstand investing with the short term gambling instincts, if you are buying for three years period at least. It is like having a SIP every week for eight weeks in a row, in your selected stocks. Your pool of stocks should be the stocks having held its uptrend on larger time frame chart, with probable price pattern and the stocks that were in uptrend in the Bull Run prior to recent correction. People who have invested in Mutual Funds and even still have some extra fund, liquid fund or debt fund then they should think to switch to aggressive equity funds like Index Funds, Bluechip Funds or Midcap Funds in a growth scheme.
However, if you were fully invested in to the markets before the correction happened and you don’t have money to invest then do smart churning, stay the course and avoid seeing the screen for next two months or so.