Trump Inferno

Markets have been on a slide in recent days, when the S&P 500 closed in negative on Friday, it was for the 9th consecutive day though this has been one of the few times when even after such a large number of negative days, the Index itself has fallen just around 3.1% making it one of the slowest grind one has seen in history.

Indian Markets haven’t done too badly though they too are on a steady decline since early September and are now down 6% from the peak. DII’s have been active buyers beating FII investments for the months of September and October. Last time we saw 2 or more consecutive  months of DII’s buying more than FII’s was way back in November 2015 to February 2016.

Every fund manager will tell you that it makes sense to buy every dip since markets have always bounced back. The question that gets unanswered is, how deep can this dip be and what point the odds of getting in makes sense vs just staying put.

Some dips are small and cozy, others dangerous and beautiful (for those who were waiting for it) and only after it has ended do we really understand the nature of the move.

Here is a pictorial view of all draw-downs from the 52 week highs.

While the 1992 and 2008 falls occupy the investor mind space, as the chart showcases, 10% falls are normal and we have had multiple falls of 20% or more.

Earthquakes are measured in Richter scale where each level is 10 times stronger than the previous one. While we have no such scale, data suggests that there is a huge difference when Index falls 10% vs 20%. Small and Mid Caps are the worst affected.

Look at the Total Market Chart here for instance. While in the above chart the 2000 fall was one of the many, stocks fell like a ton of bricks back then. Do note that since there is a survivor bias in the database pre-2005, it misses many a stock that never recovered from the deep falls it saw.

So, what am I trying to say?

While falls are normal and markets shall recover, not every fall is the same and not every stock will recover. Choose your instruments wisely and calmly.

Other than the recent instance where markets got the Brexit vote wrong, historical evidence suggests that market knows better and the trend is generally established correctly going into such crucial votes.

Take for instance our own elections of 2004 and 2009. In 2004, it was given that NDA was and will win hands down. But way before the counting happened, markets action was anything but bullish as it was well and truly into a decline. In fact, the bottom happened after the results broke out showing NDA on the way out.

While I have no answer how the market anticipates, its amazing how the trend was in place before the September 2001 attacks or the Kobe Earthquake (Baring’s Bank demise was due to that incident).

In June, I wrote whether this was the start of a bull market when Nifty was around 8200 level. Currently we still stay above that level and given that most indicators have a lag, it will be pretty late by the time we know that we are well into a bear phase.

Reactions in bull market are normal, but some reactions push the same into bear territory. Will this reaction follow similar lines? I have no clue though for now data does suggest that its still very much in a bull phase.

Markets aren’t cheap though as usual they aren’t too expensive either and its in these phases that there is ample confusion on what to do next. Should you buy the dip or wait for a further fall and what if the big fall doesn’t come true?

Historically, data suggests that markets have risen under both Republican President as it has under a Democrat guy. So, regardless of whether Donald wins the race or Hillary manages to hold on to her lead (as every poll still suggests), markets aren’t going to go to dogs.

But assuming we do have a huge reaction, the question is, are you ready? Both in terms of strategy on what you will do and tactic of how you shall do.

Results will start coming out I am told by the time Indian opens on 9th November which means that you have 2 days to get ready and act if opportunity provides one with a window.