The Ghost of the 2008 Past

I have literally lost count of the number of analysts / articles who compare every fall to 2008. Its as if everyone attempts to be the one who called the top and more the attempts, better the chances. At some point of time, we will have a significant fall and for those who were lucky to have called it just before the final blow came, book deals and even movies could / would be on offer.

Raghuram Rajan has been credited with calling the housing bubble. While he did get the bubble and how damaging it could be, anyone trying to follow his advise by shorting the markets would have been burnt and buried years before the 2008 blow came.

The recently released movie “The Big Short” based on the wonderful book with the same name by Michael Lewis showcases one such fund manager who understood the big reward that could be got by shorting and yet, due to the fact that he was early, had to go through suffering of the kind that very few fund managers can withstand.

Its one thing to call is right and quite another to actually be able to take advantage of the frenzy since not just is it tougher to initiate short positions in stocks / markets that are in bubble territory, its tougher to hold on to positions even as markets continue to move against you.

At the current juncture, Indian Markets aren’t cheap, but they are nowhere close to where they were even in 2008. Since earnings aren’t improving, our markets seem expensive but if (and I know its a big IF), the earnings start to improve, we will get very cheap very fast.

As on date, Nifty 50 is down 17.5% from its 52 week high. In 2011, we went down by nearly 25% from the highs while in 2006, we went down 30% from the highs. Unlike 2008 or 2004, these falls came with literally little explanation and hence aren’t discussed as much as they should be.

Markets once again hit a new 52 week low today and historical evidence is that whenever we have seen such a incident. the probability is high that we shall continue to go down for some more time before there appears some amount of stabilization.

Another 10% or bit more, we will reach a point where the odds of markets continuing further down start receding pretty significantly. Of course, if there is a global catastrophe, India will not remain secluded, but otherwise we should see some sort of bottoming process happen.

January will be the season of the results and February will be a month where anticipation builds up on the forthcoming budget. Unless as I said above, there is a global catastrophe or results are really bad, I doubt we would go into the budget at the lowest end of the spectrum.

Bias: Am bullish (in general) and hold long stocks and long futures (using Option Strategies).