Indian equities have witnessed a decent correction in the past five months. The correction has been regular, deep and broad. As per the historical trends, in a regular market correction, the broader markets usually correct 1.5x to 2.5x relative to the benchmark indices. This trend seems to be sustaining in the ongoing correction also.
It is debatable how long and deep this correction would eventually be, there should be no doubt that the markets will find a floor and commence a fresh up move.
To estimate a bottom, we need to first assume whether the current correction is a usual bull cycle pull back or a bear market cycle.
· In case of bull market corrections, Nifty50 usually corrects between 8%-15%, and fully retraces the lost ground in a maximum of 26 weeks from logging the bottom. In a complete bull market, the bottoms made during the intermittent corrections could be tested several times.
· In case of a bear market cycle, the usual Nifty 50 corrections have been between 20%-35%. Once the bear market ends and a new bull market commences, Nifty50 takes between 35 to 70 weeks to fully retrace the lost ground and rises to a much higher level. The bottom made in a complete bear market is usually never tested again.
If we assume the current market fall to be a bull market correction, Nifty might bottom anywhere between 21900-22600 range and make a new high by the end of year 2025.
However, if we assume it to be a bear market cycle, Nifty may be far from hitting the rock. After a few zigzag (up and down) moves it may slide towards 20000 levels (or even lower) to form a cycle bottom. A sustained up move could start only after it hits the rock.
The trading and investment strategy for the next couple of years would depend upon what assumption an investor or trader makes.
If the assumption is that it is just a regular bull market retracement, the time to unwind short positions and take aggressive buy calls may be nearing. The risk reward over one year horizon may already be positive. The strategy in this case would be to use cash position for buying on every dip; hold good quality stocks regardless of the fall; and convert weaker stocks into stronger stocks regardless of the cost of acquisition.
If the assumption is that it is a bear market cycle, we may just be half way through the cycle. The risk reward over one year horizon may still be negative or neutral. Capital preservation should be the primary concern in this case. The strategy would, therefore, be to de-risk portfolio by (i) skewing the asset allocation towards debt and cash; (ii) using rise in prices to raise cash; (ii) avoid leverage completely; (iii) convert all low quality or high beta stocks to high quality or low beta stocks; and (iv) kill FOMO and let market to hit the rock and gain first 5%. Remember, a new bull cycle usually lasts 3-4 years and could yield substantial return.
As of this morning, there are strong arguments in favor or against both the assumptions. It is, therefore, the personal choice of individual investor/trader to choose one of these. Traders may also choose to reject both these assumptions and work with a daily or weekly technical view on the market. I am still in the process of gathering information to make a firm choice.
