Friday, June 6, 2014

An imaginary Q&A session about the current state of the Indian stock market

Q. The Sensex index has closed above the 25000 level for the first time ever. Are we in a new bull market – as some of the experts on business TV channels are claiming?

A. The short answer is, strangely, ‘No’. Why? Because it is a bull market all right, but not a ‘new’ bull market.

Q. Why not?

A. A ‘new’ bull market begins after a bear market ends – not when the Sensex touches a new high.

Q. So, when did the previous bear market end?

A. That depends on whether you are a short-term, medium-term or a long-term investor.

Q. Why should the end of a bear market change depending on one’s investment viewpoint?

A. That question can be best answered with an analogy. If you stand a couple of feet away from the trunk of a large tree in a garden, all you will see is wood. If you look at the same tree by standing 30 feet away from it, you will notice details like branches, leaves, flowers, bird’s nests.

Now, if you go to the roof of a high-rise building and try to look at the same tree, you may not be able to see it at all because there may be several hundred trees in the garden. So, viewpoint does make a difference.

Q. But how does this relate to the stock market?

A. Good question. Let us look at the Sensex chart of the past 16 years.

Sensex_max_Jun0614

The 200 day EMA (in green) is superimposed on the Sensex chart because in simplistic technical terms, an index (or stock) trading above the 200 day EMA is in a bull market, and trading below the 200 day EMA is in a bear market.

  • From Jan 2000 to May 2003, Sensex was in a bear market
  • From May 2003 to Jan 2008, Sensex was in a bull market
  • From Jan 2008 to Mar 2009, Sensex was in a bear market
  • From Mar 2009 to Nov 2010, Sensex was in a bull market
  • From Nov 2010 to Dec 2011, Sensex was in a bear market
  • From Dec 2011 onwards, Sensex has been in a bull market

Q. So far so good. But how is the viewpoint different?

A. Note the bear markets between Jan 2000 – May 2003 and Jan 2008 – Mar 2009. They look like strong bear periods with significant corrections (in percentage terms) from their respective tops. However, the bear market between Nov 2010 - Dec 2011 was much milder.

In fact, it looks like a ‘rounding bottom’ bullish consolidation pattern – which is clearly visible on the 200 day EMA. So, from a long-term perspective, the ‘new’ bull market actually started back in Mar 2009!

Q. Will the shorter-term viewpoints be different?

A. Let us see from the Sensex 5 yr. chart below.

Sensex_5yr_Jun0614

From this viewpoint, the period between Nov 2010 and Dec 2011 looks more like a bear market and less like a consolidation.

Now, the 1 yr Sensex chart.

Sensex_1yr_Jun0614

Here, it seems like the entire month of Aug ‘13 was spent in a bear market.

Q. So, what is the real point of these three charts?

A. From the long-term view point (16 yr chart), the ‘new’ bull market started in Mar 2009. From the medium-term view point (5 yr chart), the ‘new’ bull market started from Dec 2011. From the short-term view point (1 yr chart), the ‘new’ bull market started from Sep ‘13.

Regardless of what your view point may be, Sensex has been in a bull market for quite a while.

Q. Why are the TV experts calling the current market as a ‘new’ bull market?

A. If I wanted to be mean, I would say that they are absolutely clueless. But I don’t want to be mean. So, in their defence, all that can be said is that their extreme short-term perspectives can not distinguish the wood from the trees.

Q. Should small investors enter the market now, or should they wait for a correction?

A. That would be the same as ‘timing the market’, which most small investors should avoid. The smart thing to do is to make a financial plan and an asset allocation plan. Based on the plans, invest your savings systematically.

Related posts

Why Sensex should touch 25000 – a long-term view
Sensex touches 25000 – ready for a drum roll?
How to reallocate your assets

3 comments:

Niteen S Dharmawat said...

Good article Subhankarji. Very well written and explained. Even a novice like me in the filed of charts could understand the messages.

Hiren Banker said...

Good One. Seen clarity in thinking and expression after a long time. Thanks !

Subhankar said...

@Niteen: Thanks. I'm sure you are not the novice you claim to be.

@Hiren: Appreciate your comments.