Mayhem in Markets. Will it End
Every Bull and Bear market is different yet when the dust is settled, it’s all the same. What is different is the way the market behaves and the speed at which it acts.
India has seen three major busts till date – 1992, 2000 and 2008. We hear those since they were related to either major scams or global market meltdowns. But those aren’t the only times markets have fallen.
In 1991, with India on the verge of political instability (the then Chandrasekhar government could not pass the budget in February 1991) and a serious economic crisis. Foreign Exchange Reserves were declining to the extent that India in January 1991 borrowed $777 million from the IMF.
But markets had peaked in October 1990 and by the end January was down by 41%. But right when it should have crashed and burned, markets started to rise even though Foreign exchange reserves dropped to an all-time low of $1.1 billion in June 1991, barely sufficient for two weeks of imports. But the October 1990 high was taken out by July of 1991.
{Source of Fx Data: Montek Singh Ahluwalia. BACKSTAGE: The Story behind India’s High Growth Years}
Between 1986 to 1988, again a period of government instability, markets fell 40% before recovering all by October of 1988.
Let’s look at some International Evidence
First, the London Market during World War II. The pics below is from the book Wealth, War and Wisdom by Barton Biggs.
Japanese Market during World War II and later the Korean War (Peak and Trough)
Biggs concludes with the following
Is Corona Virus the Black Swan that will result in a total breakdown of financial and social infrastructure as we know it? I don’t know but I think the odds are pretty low even though as country after country closes their gates to outsiders, it surely feels as such.
In the last leg of a bull market, the seller is staying away hoping for a better price tomorrow while the buyer is willing to pay whatever the market asks today. Today, we are seeing the opposite of it with the buyer staying away hoping for a cheaper price tomorrow while the seller is willing to sell it at whatever price it can get.
Which reminds of this famous pic from the Great Depression
Let’s look at the broader picture to understand where we stand today. First off the 10 year return.
If you had invested in Sensex 10 years ago, your compounded return today would stand at 5.02%. The previous time you had seen this kind of low return in this Century was if you had invested in 2007 just before the financial crisis brought the world’s banks to its knees. Most of the other instances are for investors who invested in the period between 1991 to 1994 (ending period being 2001 to 2004).
The Sensex is currently 26.50% below the 200 day MA.
While it has come here couple of times in 1992 and 2002, the only other time it was comprehensively down was in 2008.
Nexg, a look at one of my favorite breadth indicators. Percentage of stocks that are trading above their 200 day EMA’s
We have briefly went below in the past but other than in 2008, rarely stayed there for more than a few days at best.
Number of Stocks with Positive Momentum
Basically this is closing in onto the lows of 2008 (which came nearly 8 months after the crisis started versus being in the very first month this time around)
New 52 Week Lows
On Friday, 1000+ stocks registered a new 52 Week Low. With 2500 stocks being in the database, this means that 40% of the market was hitting new 52 week lows that day. A record with exception of 2 such days in October 2008.
Relative Strength Index {RSI}
Relative Strength Indicator is an indicator used to measure the strength or weakness of a stock or market based on the closing prices of a recent trading period. As of today’s close, 1400+ stocks are in oversold zone
30 Day Volatility
Enough Said.
A Interesting Twitter Thread
Compared to other falls where disruption was caused due to economic reasons, this time around the fall has very little to do in terms of direct economic or bank / credit related reasons. Banks are very much in business, there is no credit freeze or houses and jobs being lost, at least not yet.
Weak businesses need very little reason to fail and Cornavirus may be instrumental in taking them out of the works. Non Performing Assets may rise but given what we have already seen, the rise may not be as catastrophic as we assume.
The darkest hour is just before dawn. I don’t know if we can go darker for there is plenty of space to go lower, but the odds are already in favor of investing if one can hold onto it for a few years.
In recent years, company growth has been ispid but still very much in positive territory. While future earnings will definitely be impacted by the current situation, the question is how much and how much of it has already been discounted.
Drawdown from Peak
On the NSE, just around 27 stocks have a draw-down from peak lower than 20%.
There is no magic strategy that can avoid draw-downs. Be it Passive or Active, Be it Value or Growth or Momentum or Quality, you shall be hit with draw-downs some time or the other. Going to cash seems an optimal way but this generally comes at the cost of returns. One cannot regularly keep going into Cash and still out-perform the market.
Dow as I write this is down another 2000 points and now close to breaking the 19,000 levels, a level from which it broke out in 2017. On the other hand, our Small Cap Index is pretty close to where it opened in 2010 (and was where it was in late 2007 as well) while the Nifty Mid Cap and Nifty 50 Index are where they were last found in 2015.
Stick to your strategy. That is the best hope for now and forever.
1 Response
[…] Mayhem in Markets. Will it End | Portfolio Yoga […]