Stock markets in serious bear grip

Unexpected spreading of coronavirus to new countries including the US, spooked global markets last week. The Indian benchmark indices followed the global peers. Indian markets logged in the highest weekly decline last week after the 2008-09 global financial crisis. The Nifty fell by 879.1 points or 7.28 per cent while BSE Sensex shed 3,026 points during the week, thus registering a second-worst weekly fall in history.

In the process, investors lost Rs 11.8 lakh crore in the past six sessions. Nifty Midcap-100 index lost 7.2 per cent and Smallcap-100 index crashed by 7.7 per cent. The Nifty Metal index is the worst hit as it has fallen by 14.5 per cent. The Auto index lost 10.3 per cent and Media and PSU Bank index declined a little over 10 per cent each.

As the market fell by 10 per cent from its top, it decisively entered into a bear market. In February, the Nifty lost just 6.36 per cent. Though it is the second-largest weekly fall after the 2008-09 crisis, on a monthly basis it is the third-largest decline. As I mentioned earlier, most of the tops are formed in the Jan-Mar quarter. This time too, it did not miss that time cycle.

All the major tops were made in the first quarter of the last 15 out of 20 calendar years. Will try to examine the past bear markets and compare it to the current one. A decade ago in 2008-09 the Nifty fell by 64 per cent in just 10 months thanks to the subprime crisis in the US. In January 2008, it fell 30 per cent from high to low and 16.23 per cent from open to the close. Similarly, in the same year in October, it fell 43.69 per cent from high to low and 26.43 per cent open to the close.

In 2011 bear phase, the Nifty fell by 28 per cent in 13 months. In, 2015-16 downfall, the Nifty fell by 25.15 per cent. During the recent correction in 2018 Sept-Oct, the Nifty fell 15 per cent in just 28 trading sessions. The index shed 12.11 per cent in the recent correction during June-Aug 2019.

Further, in 2008, the Nifty carnage ended at 61.8 per cent retracement of the prior upswing.

In 2011 correction was on about 45 per cent and in 2015 it got corrected by 50 per cent of the prior upswing. In 2016, the index shed about 50 per cent of the prior swing. Historically, most of the falls limited to 50 -62 per cent of the prior uptrend. If we consider the February 2016 bottom of 7600 to January 2020 high of 12430 as an uptrend, the Nifty not even corrected 23.6 per cent.

The 23.6 retracement level is placed at 11107 and the 38.2 per cent retracement is placed 9628. Interestingly, after October 2018, the Nifty never made a lower low on a monthly chart. If Nifty falls below Aug 2019 low of 10637, for the first time, it will form a lower on a monthly basis.

In the worst case, scenario, if Nifty sees 20 per cent from the top, it will test the Oct 2018 bottom of 10,000 levels. Then, the correction will be 43 per cent retracement of the 2016-2020 bull market. The Nifty must hold a 23.6 per cent retracement level of 11107 or 50 points plus or minus. We can expect a pullback from 11050 to 11150 zone. This is only an expectation.

Otherwise, if it falls below 11050, where the upward trendline support placed, the next major support is at 10637. In this scenario, it is too late to take a short position and too early to enter into the long positions. Wait for a higher low bar and closing above the prior bar high. That is the first sign of short term bottom or end to a free fall or beginning of the consolidation phase. It is too early to say, we are at the bottom. We may be at the beginning of the bear market.

If we look at the valuations, in all bear markets the Price/Earning ratios fell to 10- 15 level. In 2000, the PE fell from 28.47 to 10.84 and in 2008 the PE fell from 28.29 to 10.68 levels. In 2011, the PE fell from 25.91 to 16.71. Now the Nifty PE levels came down from 28.67 to 25.49. So, this fall is a long way to go to get a reasonable valuation.

Even if we expect 20PE for Nifty for a reasonable bullish view, it must correct another 10 per cent from here. It sounds scary but, the confluences of time cycles, technicals and fundamentals indicates that we are in a serious bear market conditions.

(The author is a financial journalist and technical analyst. He can be reached at tbchary@gmail.com)