Historical New..Lower Circuit after gap of 12 years……..Anatomy of a Bear / Bull Market in Equities

TIME TO BUY EQUITIES….

Historical New….Lower Circuit on March 13, 2020 after gap of 12 years and Biggest Intra Day Recovery since Birth of Index in last 40 years

An old Market Proverb is “markets stop panicking when the government begins to panic”. However, the current market conditions appear defying this conventional wisdom. Instead, the panic shown by the Government Authorities in dealing with the threat posed by the Novel Coronavirus (COVID-19) has caused deeper panic in the financial markets.

Anatomy: Domestic Equity Market Mirrored Terror driven Mother Market, overreacted in fear due to the spread of the novel coronavirus and witnessed correction of about  32  percent recently. Indian Equity Market has stopped trading for 45 minutes as the benchmark index, Nifty50, hit lower circuit mostly dragged by the global sell-off on the rising worries amid Covid-19 outbreak.

The Sensex shed 3,090.62 points (or 9.43%) at 29687.52, and the Nifty was down

966.10 points (or 10.07%) at 8,624.05 in morning trade on March 13.

Last time Indian market hit lower circuit was in 2008… Indian Equity Market has hit the lower circuit for the first time in 12 years after January 21, 2008 crisis.

Anatomy of a Bear / Bull Market in Equities from here…

Recent Unprecedented Equity Market Volatility has Puzzled investors as well as all of us and we are making an efforts to READ the Direction of Equity Market by way of Technical and Fundamental Analysis…

Technical Analysis: Technical Analysis is the forecasting of Future Financial Price Movements based on an examination of past price movements. Like weather forecasting, Technical Analysis does not result in absolute predictions about the future. Instead, Technical Analysis can help investors anticipate what is “likely” to happen to prices over time. Technical analysis uses a wide variety of charts / parameters that show price over  time.

WAVE THEORY: Wave Theory is more appropriate in terms of understanding the market moves as compared to Fundamental Analysis. Careful Analysis reveals that  the  Wave Theory can be interpreted Bearish as well as Bullish in present levels…

Bullish…..

We know that since birth of NIFTY in 1993, it has completed one Big Bull Run in 2008 touching 6357 level, which is followed by a second corrective wave in 2008 correcting to 2252. According to bullish view the 3rd wave started from the low of 2252 completed at  12103 in June 2019 and since then we are in irregular corrective phase ABC making high    at 12428 and C might have ended yesterday (13th Mar 2020)  at  8555.  But  yesterday  market behavior provides more confidence that the market has bottomed out and is ready for next 5th wave which should take the Index at higher levels.

As you are aware that on account of declaration of Corona Virus Infection as Global Pandemic by WHO, Global Markets (Especially Equity) including Indian Markets is witnessing Unprecedented Volatility. Thus if the bottom is not created yet then the Market can go down to touch 8000 levels and 5th Wave will start from thereon.

Bearish…

But same wave count can be interpreted in bearish sense where 5th ended yesterday as per below chart at 12432 on 20th Jan 2020 then 5th wave was extended from the low of 6826

at Feb 2016. Since all extended wave is retraced in faster time, it means the market will bottom out from present levels at 6800 – 7000 and/or 8000 levels. Post that next Big Bull Run of India will Start.

 

Thus from the above two Analysis, we cannot say whether we should remain Bullish or witness some more corrections from present levels. The monthly closing for March 2020 would very critical in assessing the future course of the markets.  A monthly

close below 9506 would open the floodgates and chances of Nifty ending at 6800 – 7000 and/or 8000 levels is a possibility. However, if the market rebounds from the current levels, closing the month above 10525 level, we may take a sigh  of  relief  and look forward to some decent gains in 2HFY21.   The Bullish view is further supported by Fibonacci Time Zone Analysis.

Technical Analysis: Fibonacci TIME ZONE

Fibonacci Time Zone is a Technical Analysis Tool consisting of a series of vertical lines which extend along the X – Axis (Horizontal). These lines are  placed  according  to  the Fibonacci sequence. The main function of the Fibonacci Time Zone tool is to forecast or anticipate potential reversals based on elapsed time.

Time Zone Forecast / Extrapolation
Low of 2013 to High of 2015

(Approx. 377 Trading Days)

Correction Expected for 233 Trading days

(61.8% of 377 Trading Days)

High of 2015 to Low of 2016

(Approx. 233 Trading Days)

Rally Expected for 610 Trading Days

(161.8% of 377 Trading Days

Low of 2016 to High of Aug 2018

(Approx. 610 Trading Days)

Correction Expected for 377 Trading Days

(61.8% of 610 Trading Days)

High of Aug 2018** to Low of Mar 2020

(Approx. 377 Trading Days)

Rally*** Expected for 987 Trading Days

(161.8% of 610 Trading Days)

** If Aug 2018 High is taken as Final Point, the entire Pattern Formed after this till now to be considered as a Correction

*** The Rally will not be Straight Run, but with Intermittent Rallies and Pullbacks

 

 

 


 

 

 

 

 

Fundamental Analysis: Fundamental Analysis is a method of evaluating the intrinsic value of an asset and analysing the factors that could influence its price in the future. This form of analysis is based on external events and influences,  as  well  as  financial statements and industry trends.

India‟s Market Cap to GDP Ratio

The Market Cap to GDP Ratio has corrected over the last 3 years and is contained well below 100. This highlights that valuations are Not in Euphoric Zone.

The Stock Market Capitalization-to-GDP Ratio is a Ratio used to determine whether an overall market is undervalued or overvalued compared to a historical average. … It is calculated simply as stock market cap divided by gross domestic product.

India no more overvalued…

 The Market Cap-to-GDP Ratio, largely known as Buffett indicator, now stands at 61 % against a long-term average of 78 %.

Valuation Perspective


 
NIFTY 50 Index: A first for Earnings Yield since Note Ban…

Currently Earnings Yield of the NIFTY50 Index exceeds bond yield by 45 bps and such instances have provided high expected returns in the past. Examples include

„Demonetisation‟ (44 bps) and „Taper Tantrum‟ (+44 bps). However, the environment of a global recession could result in further spike in earnings–bond yield.  A  full-blown  global  recession like the GFC of 2009 resulted in spreads widening significantly to 500+ bps.

Equity Valuation Index making a strong case for adding equities at this juncture. Global crisis have always provided a good opportunity to invest in equities. We believe with recent correction due to concerns around COVID-19 spread, market has stepped into an oversold zone. This provides a Good Margin of Safety for Equity Investments

 

Poor Performance Of Midcaps In Last 2 Years Offer Good Entry Point After 2 years of poor performance, midcaps typically post stellar returns

 

Directional Equities…

  • Investors comprehending Bear taking charge NOW do not REALISE that Indian Equities have been in a bear market for past five year at least. The advance decline ratio of the issues traded on NSE has been negative for five years.

How Did The Indian Stock Market Perform During Past Virus Outbreaks

Market Correction in Equities is Temporary whereas Growth is Permanent !!!We need to introspect / extrapolate, where Equity Market will be in next 3 years…

 Conclusion:

  • If Bearish Trend Prevails: NIFTY may bottom out at 6800 – 7000 and/or 8000 levels and eventually reach 13300 – 15000+ levels in next 3 years‟ time.
  • If Bullish Trend Precedes: NIFTY will start its journey to touch 13300 – 15000+ levels in next 3 years…The Rally will not be Straight Run, but with Intermittent Rallies and Pullbacks.
  • RISK REWARD ANALYSIS: Careful observation indicates  consensus  EPS  of  NIFTY for the FY 2019 –  2020  at  Rs.  510.  Taking  15%  growth  (on  account  of  bad  year  2019-20), EPS for FY 2020 – 21 will sport at Rs. 587. In Dec 2020, Market will start discounting EPS for the FY  2020-21  earnings  and  at  17 PE  Multiple  (Long  Term  Average), the NIFTY in Dec 2020 can see 9971 levels (12900 at 22 PE Multiple) and similarly the NIFTY in Dec 2021 at 17 PE Multiple will look at 11500 levels (14800 levels at 22 PE Multiple). Thus in brief, we have less to loose from  the  present levels of 9955. In our opinion if one does not invest, it will be a GREAT OPPORTUNITY LOSS. 

Investment Strategy: 

  • Investors who do not have allocation to EQUITIES…Its’  an  appropriate  time  to consider taking exposure to EQUITIES in staggered way.
  • Investor with EQUITY exposure should not PANIC and should stay invested. Infact, according to Risk Appetite, should consider adding equities according to their Asset Allocation Strategy at every opportunity Equity Market provides.
  • WE STRONGLY ADVISE INVESTORS NOT TO LEVERAGE PORTFOLIO AND MAINTAIN BALANCE OF FEAR AND GREED… 

Midas View:

In the event of southward movement of Interest Rates to the levels of 5% (Stimulus measures to combat the impact of Coronavirus), Real Estate and Equity Market will become preferred destination for investments leading to surge in Growth. Similar pattern were observed in Equity Market after demonetization and Equity became preferred destination of investment on account of low FD Rates. The probability of  Big Bull Run holds true, but may take some time to shape.

Market may take sharp rebound either on discovery of Vaccine for Coronavirus or on fact that the Spread is contained.

 

We wish Good Health for you and your Investment Portfolio 

 

Author: Midas Finserve

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