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Tuesday, January 18, 2011

Is this a Bear Market, or a Bull Market correction?

Every time the stock market is in a down trend, small investors start to get worried. Is this a bear market? Should they sell and protect their cash? Or, is it a correction in a bull market that is providing a good opportunity to enter?

Food inflation is not getting controlled. Too many scams. FIIs are selling. IIP figure is not encouraging. Oil price is rising. Commodity prices are going higher. Q3 results declared so far have been a mixed bag. Seven out of ten previous Januarys have been down months. The indices failed to go past their Jan 2008 tops.

The scale is tilted towards the possibility that we may be in the early stages of a bear market. Even a leading technical analyst who writes for one of the leading pink papers feels that the Indian stock indices have slipped into bear territory. Have they? The short answer is: Not yet.

Why? Here are a few accepted technical definitions of a bear market. Let me list them out:

  1. A 20% correction from the top. The Nov ‘10 top in the Nifty 50 index was at 6336. A 20% drop would mean a level of 5070. Yesterday’s (Jan 17 ‘11) intra-day low was 5624. That means a correction of about 11% so far.
  2. A convincing drop below the 200 day EMA. The Nifty 50’s 200 day EMA is at 5650. A 3% ‘whipsaw’ leeway means a level of 5480. In the current down trend, the Nifty 50 is yet to close below the 200 day EMA, though it is showing signs of doing so.
  3. A greater than 50% retracement of the entire bull rally. From the Mar ‘09 low of 2539 to the Nov ‘10 high of 6336 was a strong rally of 3800 points. A 50% retracement means a 1900 point fall from the top – to a level of 4430. That is far away.
  4. The 50 day EMA dropping below the 200 day EMA. The 50 day EMA has started falling, but remains more than 350 points above the 200 day EMA.

None of the four definitions have been satisfied. This is still only a correction in a bull market.

The Nifty has tested support from its 200 day EMA and bounced up today on decent volumes. But it is showing signs of correcting some more. The zone between 5400 (Apr ‘10 top) and 5550 (Aug ‘10 top) should provide strong support. Note that the level of 5480 (mentioned in item 2 above) falls right in the middle of this support zone.

As long as the 5500 level is not breached, the bears will not get control. So that is the level to watch out for. But that is only if you trade in the Nifty. As small investors, we should watch our portfolios closely and check if any of the stocks are meeting one or more of the four bear market definitions given above. Bail out of such stocks.

Also look at stocks that are proving resilient in this correction and have fallen less in percentage terms than the Nifty 50 index. They may lead the next leg of the bull rally, and could be worth accumulating. Please do your due diligence before taking any buy/sell action.

7 comments:

Jasi said...

Wow, another one for my collection. :) Very precious thoughts there.
Appreciate your effort in spreading awareness sir!

Thanks n regards!

Harshit said...

Fantastic!

You should be on CNBC. What you are doing there in K'tta?

I will sell my portfolio only when nifty satisfy these conditions, till then enjoy!

best said...

I am following Tata Sponge Iron, Usher Agro, Graphite India and Biocon which is not corrected on this downside rally

please let me know your views.

Bharath said...

Hi Dada,
Well, I am very much with you ...but some concerns to raise as well, recent correction did mainly impact Large cap and sensex companies rather than Midcaps and small caps which were butchered much earlier.

A Large cap has corrected a long way, its none but L&T. 24% correction from recent top.Anyways I exited just before the fall mainly in line with valuations front.

Again one another small query, do you belive in Value investing, i.e investing in a company which have good growth history in earnings, ok types balance sheet, but a terrible stock pricing history.

Please have a look on Compact Disc India, which has a P/E around 0.91 and Growth rates between 30% y-o-y.
Waiting for your comments..!

Subhankar said...

@Jasi: Thanks for your comments.

@Harshit: Appreciate your comments. If you see me on CNBC, you probably won't believe what I say anymore!

@best: Don't track any of those stocks. On the charts, only Biocon looks good. The other three have gone nowhere in the past 12 months.

@Bharath: When something looks too good to be true, it usually is! Compact Disc is in a bear market, which means any rise is a selling opportunity.

math.la said...

Hi Subhankar, another excellent article from you. You have really set the bar pretty high.

BTW, have you looked at a company called Geodesic ? I have substantial investment in it for the last many years. This co. I believe has suffering lately from what I call as the ICSA/Tanla effect, ie. if a stock is at an unbelievable valuation, the management must be up to some major hanky panky. Whatever the reasons be for the current low price, it has been a great performer for most of the last 10 years of its existence. It is I believe a great buy.

Thanks for your excellent article. Do give us more of the same.

Subhankar said...

Thanks for your comments.

I tracked the Geodesic stock for quite some time but could not figure out their business model.