Vijay Kumar Gaba

 The benchmark indices are scaling new highs every week for past seven weeks as least. The sharp recovery in markets, from deep correction in March, must have surprised most market participants. Many who panicked and sold off in summer are wondering whether it’s time to “Buy” again. Many who remained invested are wondering whether it’s time to ‘Sell”.

The broader question therefore seems to be, whether we are in a new bull market since April 2020, and the stock prices have a long way to travel north before any meaningful correction sets in; or it is a bear market rally that is normalizing the steep fall in March 2020 in the wake of total lockdown announced post outbreak of pandemic.

The last bull market started from August 2013 and lasted 5yrs till August 2018. In case we believe that it is new bull market that would mean that the bear market that started in August 2018 ended with panic bottom of March 2020.

However, if we believe that March 2020 panic fall was an aberration and the current sharp up move is just normalizing that aberration, and the regular bear market will play out after this normalizing cycle is completed in next couple of months. In this case we shall see markets stabilize around in 11500-12100 range and then decline gradually for some time. We had seen a similar situation in 2006-2009. In May 2006, markets corrected 25% in 3weeks as the first signs of subprime crisis emerged. But then markets rallied almost 100% (from lows of June 2006) in June 2006-January 2008 period; only to bottom around June 2006 levels in March 2009.

The moot point is how do we decide what state the stock market is in at present! The signals from the markets are indicating that regardless of the one way move in the market, the popular opinion is divided.

For example, the following are some signs indicate to a bull market:

(a)   Many IPOs since March 2020 have got tremendous response from investors.

(b)   Analysts are either ignoring bad news or finding positive angles in bad news . For example, consider the following:

·         One of the key argument for support of consumption related stock was the government support to the rural population. However, the news of PM-Kissan disbursement not happening (see here) was given a positive twist to imply that fiscal situation may not worsen after all.

·         M&M subsidiary SsangYong default on debt was given a positive twist to imply that M&M is sticking to its commitment of not investing more capital in loss making subsidiary.

·         Despite concerns over rising defaults on unsecured loans after the forbearance period ends, the valuations of many consumer focused NBFCs have breached the red lines. Analysts are supporting these valuations in the name of business consolidation, potential bank licenses etc.

·        S&P forecast of 7.7% contraction in India’s FY21 GDP was widely reported as “upgrade”.

 

(c)    All sellers are seen regretting almost immediately after the trade, as prices rise further before the payout is received.

(d)   Traders, investors and even fund managers are searching for stocks that have underperformed the peers, and betting new money on them in the name of “value”.

(e)    The social media timelines are overwhelmingly populated with success stories of popular traders and investors. The cautious investors are being guilt shamed by taunts of “I told you so”; and “I bought xyz in March 2020 and made return of $$$% in 9months”.

On the other hand, the following signs point to the possibility that it is a bear market rally that is normalizing the excesses of March 2020.

(a)   There is no particular theme or trend in the recent rally in stock prices. Stocks from diverse sectors like Bajaj Finance and Kotak Banks have become most expensive stocks perhaps globally, while ICICI Bank and HDFC Bank have lagged. Tata Steel has reached peak valuation while Hindalco has lagged. Tech Mahindra has ralled hard, while Infosys and TCS have lagged. Asian Paint has outperformed HUL massively. RIL has outperformed Bharti.

(b)   Domestic mutual funds have faced redemption in past couple of months. Domestic institutions have been net sellers so far this year, while foreign institutions have been net buyers.  However, there is no clear pattern in the flows, indicating tentativeness and lack of conviction. Overall net institutional flows have been marginal ($3.5bn) YTD.

(c)    Most of the rise in market has occurred due to valuation rating and not supported by earnings or forecast of earnings growth.

 

(d)   Last week the top gainer in NSE500 included some companies facing survival issues.

Personally, I am more inclined towards the second view (bear market rally). But I would leave it to readers to apply their own wisdom and decided their strategy.