An Investor's Diary

Typically, a bull market in equities begins with the smart money discovering the value in the market. The market leaders lead the rally. Broader market usually underperform the benchmark in early phase as the wounds inflicted by the preceding bear market are still fresh, the safety of principal and fear of further fall in market is still the dominant sentiment.

Subsequently, the followers join the rally. Having missed the rally in market leaders, the herd usually tries to discover value in broader markets. As the confidence in recovery grows, the fear now paves the way for rationality and return optimization. The broader market begin to marginally outperform the benchmark indices in this phase.

In the last phase, the masses join bandwagon. Discovering multi baggers and return maximization becomes a passion. Greed is conspicuously the dominant sentiment. The divergence between the benchmark and broader markets is stark. The jargon changes. New valuation methodology are devised to justify the irrationality in valuations. Proliferation of companies with unproven business models is quite normal in this phase.

The reversal post this phase is often sharp, deep and painful. The broader markets crash vertically. The benchmark indices correct sharply. Invariably, the greed is found lying on the street, totally shattered.

The story has been the same in all the price cycles, the markets have witnessed so far, without exception.

In my view, we are presently in the last leg of the last phase of the current market up cycle that began in summer of 2013.

Those who witnessed the last major market cycle (2005-2009), would recall the period between July 2007 and January 2008. Subprime crisis in USA had already raised its head in July. The markets took a notice and corrected around 10%.

But the money was so easily available and greed was so overpowering that our markets rallied almost 50% in the following 6months, only to collapse in the following year 13months.

All the arguments that are usually being extended to support the current equity prices, were present then in even stronger force.

The difference was that the world was willing to work together to ward off the ill effect of any global crisis, central bank balance sheets had lot of scope to expand, China and India were growing over 9% and many other large emerging economies and frontier economies were looking to grow even faster. Commodities' world was booming as China was guzzling whatever the world produced. The world was growing at 4%+ rate.

Today, the world stands fragmented. UK leadership is busy managing Brexit, US leadership is totally committed to parochial interests, so is China, India and Russia. Peripheral Europe and LatAm remains as vulnerable as it was 6yrs back.

As stated earlier, in pure technical terms, I see Indian markets in the last leg of the bull phase that started from summer of 2013. The correction from here will be sharp and deep.

While it is difficult to forecast how much more it can go up, before the correction sets in, it is easier to forecast the contours of the down cycle, that is as follows:.

Strictly in technical terms, Nifty has definitely completed the up move that started from 28 August 2013 from low of 5285 (intraday low 5118) a few months ago. Any move beyond 10114 is a bear market rally, in my considered view.

Base case for 2018

Nifty should bottom around 8470 in next 13months, i.e., a 50% correction of the rally from 6825, the low of March 2016.

Probable scenario for 2018

Nifty may correct 38 to 50% of the up move (5285 to 10114) in next 13months. Which means, the downmove may bottom between 8280-7700 Nifty level by January 2019.

Worst case scenario

The worst case scenario could be that Nifty corrects the entire gains made since March 2016 low of 6825.

To sum up, in strict technical sense—

(a)   Indian equities are no longer in a bull market.

(b)   From the current level, Nifty may correct 20-35% over next 13months.

(c)    Every rise from the current level is an opportunity to sell.

	( This is a forwarded article and not our view. Please do your research before deciding upon anything)