Friday, October 11, 2019

Fear dominating the greed

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.
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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.
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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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