In past few months, a large number of prominent market experts
have publically stated that the present phase of market correction is perhaps
the worst they have seen in their life time. Many of them have recently
indicated that the Indian equity prices may be close to their bottom and a
recovery is imminent.
In view of these assertions by the prominent market
personalities, I find it pertinent to examine, whether equity prices are close
to hitting the rock (if not hit already).
For me, the most successful, though intuitive indicator of
market bottoming is the dominance of "fear" over "greed".
The phenomenon is usually reflected by a combination of the following three
factors:
(a) Sharp underperformance
of broader markets as compared to the benchmark indices, for the current market
cycle.
(b) Materially negative
market breadth for the current market cycle, indicating capitulation of large
number of non institutional investors.
(c) Sharp rise in market
volatility.
Current market cycle
There is difference of opinion as to when the current market
cycle actually started. The purist believe that the current market cycle
started from end of August 2013, when the newly appointed RBI governor
unleashed aggressive measures to stem the worsening CAD and the finance
minister also announced a number of measures and Nifty bottomed at 5287 on 27
August 2013.
Whereas a number of market participants believe that the cycle
that started in 2013 ended in mid February 2016, and a new cycle started with
presentation of budget for FY17 on 29 February 2016 after a Nifty closing of
6825 on previous day.
Both the groups have different parameters for the Nifty
bottoming. The first group believes that the current market cycle shall end
with Nifty breaching 10k mark in next 6-8months. Whereas the second group
believes that the Nifty has already made a bottom on 19th September 2019 around
10700 level, even though a new cycle in Nifty may take some time to commence.
I am inclined towards the latter group and believe that the
current market cycle is close to the bottom, though a sustainable up move may
be 6-9 months away. In the interim lower levels for Nifty may not be completely
ruled out.
Greed and Fear Index
Scenario 1: Present market cycle started in August 2013
If we presume the current market cycle started from August 2013,
the greed and fear index is far from bottoming.
(a) The market breadth is
overwhelmingly positive for NIFTY500 as well broader markets.
(b) The CAGR for mid and
small cap indices is much better than the benchmark index.
Scenario 1: Present market cycle started in August 2013
If we take the current market cycle from February 2016, the
greed and fear index is close to the bottom.
(a) The overall market breadth
has become negative while for Nifty500 it is a healthy 2:1, implying the
capitulation for low quality stocks.
(b) The CAGR for small cap
(8%) is almost half of benchmark index (15%) and close to the bank deposit rate
leaving no risk premium for the investors.
Both in 2013 and 2016, the cycle changes were accompanied by the
heightened volatility. We are currently witnessing a similar phenomenon, which
supports the hypothesis that the fear may have begun to dominate the greed.
To conclude, in my view the Indian equity markets are close to
completing the bottoming process for the current market cycle that started in
February 2016. The next cycle may commence anytime in next 6-9 months, but it is
more likely to start in 2H2020.
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