Are we In a Bear Market?

Published: Sat, 09/29/18

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29 September 2018

Are we In a Bear Market? - Answered !

When I wrote the Long Short Report last month there were many reasons to think why calling it ''The Big Short 2.0'' was Apt. Now after what has been a rabbid Sept 2018 you may want to agree. Just like Many want to agree that a bear market must be defined by a 20% market decline. Most bear Markets in India that I have been through were far bigger so they went down 50-70% in index terms. At 20% you only get a correction.

So you are telling me that if the Nifty falls 21% then you want to sell? Ask anyone with a stock portfolio trying to sell yesterday. The Small cap index is now down more than 30%. In July I shared with you a statistic that more than 80% of stocks of a 1200 odd liquid basket were below their 200 day moving averages.

In fact one of the charts that carried my Long term conviction is above. That of an inter market divergence between the Midcap and Nifty indices. This is a multi month divergence and the significance therefore is also similarly longer term.

People will argue what if it is wrong. Then anything in the world can be wrong. The conviction must come from not one tool or method but its combination with others.

The most important market defining tool that I finally took into my market analysis in 1999 was Elliott Wave Principle. The rest is history. Because like most technicians before 1999 I thought I was right or that I could see the market unfold but in reality got many moves wrong in practice. By then I had but mastered the use of most of the non EW tools I still use today. What Elliott Waves did was to have an exponential impact on my trading and investing outcomes and my Calls and Opinions over the years. So there is a reason that I draw my convictions longer term from there

I also follow a top down strategy giving the higher time frame view a higher importance than the lower time frame. So if long term I think we are in a Supercycle degree top then that focus has me working around where it will end. In 2001 when I joined Sharekhan the focus was on the start of a 10 year Autumn bull market and that was a different focus. So at the risk of sounding perma bear for years now I am highlighting the ending patterns in stocks and equities in India and the world. Like it or not.

Back to the moot point then that goes against all the EW charts online with 1-2-3-4 markings and calling 20% a bear market. Let me now give you some perspective from history and I started watching the stock market on a weekly basis just months before this first mini bear market. Here is a run down of the Indian Bear.

The Gulf War - this one was short lived but what was interesting is that the decline over the months that followed ended at 70% retracement.

By 1991 i starting plotting my first charts on paper. 1992 was the much remembered Harshad Mehta bubble, backed by money borrowed out of a loophole in the inter bank markets. When it ended a one year bear market followed where stocks like ACC lost 80% after making a high of 10550 [Rs. 100 paid up stock], I know one person who bought at that exact price. Anyway what followed was a 70% retracement of the rise from the post Gulf war low..

As written on this chart shis is a Less remembered period by most, but not so by me because in 1994 Sept i started working at Dalal Street Journal, yes at the top of the market back then. The mania was evident on day one. 1-2 dozen IPOs a week and I had to analyse one IPO in 2 days for the publication with a rating on it. This was followed by many scams from Underwriting scams, MS Shoes scandal, and eventually, NBFC bubble going bust. This last part will be even less remembered. Funding by companies and Finance companies was often via fixed deposits and Debentures. Most listed companies did it. After them NBFCs financed investments at high rates, but when they could not pay it back they simply went out and raised more money from the public at higher rates to save the day. This went on with A+ rated stocks hitting 21% interest rates. Eventually the big names to go down were CRB Finance [If I have the name right], as they defaulted on small investors. The next many years RBI spent tightening rules on NBFCs till then entire sector was shut down. Shut down is not an understatement. The truth is this even today, NBFCs are shadow banking and invest in lower rated debt that banks will not go after. The business is good for years till it is not. It always ends badly. But today like never before valuations to this sector were the highest that I have ever seen, yes more than back then. I do not think a P/E of above 15-20 was sustained by an NBFC in the 90's. Also Midcaps that topped in 1994 went on to lose 70-90% from the top or even get entirely delisted. What did not help was after 1996 the public voted out the Congress in favor of change, and we got years of coalitions that could not move anything at the center. You might want to ask why after kicking off the biggest reforms in recent history and Opening up the Indian economy and markets from the Licence Raj, the Manmohan, PVR, combine was voted out. The answer I can think of if this. The reforms led to huge inflation that led to the high interest rates above and eventually the collapse of growth. Add to that all the scams that followed the free for all regime without regulation or law and order.

Long note above maybe it was early in my career but I remember it well. Including that at the 1994 peak everyone in the First Class compartment of the Local trains was reading a ''Bhav copy'' - [the EOD price list of stocks then published by BSE in the non internet days] - a clear sign of over participation and a top. Yes the bear market that followed also saw a 70% retracement that was put to test many times due to the above.

The Tech Bubble - is the better name for this one though the ICEing was done by Ketan Parekh and his use of the mismatch in the NSE and BSE settlements to accumulate large positions without paying margins. you may not have read this anywhere but Arbitrage = 56% per annum returns at the peak.Arbitrage was a means of financing this activity zero risk almost except delivery risk. The bear market that followed? More than 100% retracement!! The most ever. Only reason I can think of is that tech stocks were added late to the index and so the index did not capture the upside as much as the downside.

Now 2008 is what more people remember as the US Housing bubble but after a 7 year bull market it was also the India Infra story bubble in roads power realty etc Before the start of this I joined Sharekhan, and called it from the start. What I also did was call most of the corrections in between. While the corrections were steep retracements of the smaller leg the % fall was in the 25-30% range. This is important. The 2008 bear market lost 64% in the Index. But again in retracement terms was 70% of the preceding bull run.

After calling the 10 year bull market in 2001, 2011 was close enough and I started writing my Indian Economic winter reports. Early in hindsight from a index perspective. But the highlight was that stocks in debt would not perform and they did not ever since. Infra realty Psu banks etc have all gone down since 2011-2014 tops to never come back. I did not think that the process of recognition of debts at the corporate level in India would take so long, till 2015 after RBI pushed the banks. And with what might end up being another NBFC bubble. Call me out but in a Supercycle degree bear market debt is where the trouble is and NBFCs are all about lower rated debt. I laugh at rating agencies that give AAA rating to any NBFC because they then equate it with top rated corporates or even the country rating. Nuts. For a lender that gives out loans to higher risk categories of borrowers AAA is meaningless even without looking at the balance sheet. The business model is not to lend to AAA. Call me out on this

But the point again is this, all the corrections above and below during the 2009-2018 period were in the 25-30%. A correction of 25-30% is normal within a bullish trend. It is the reason I was a little butlish at the lows of 2016, the fall after one year was not much. What I expected was a retest of the highs but not a runaway move again. [The chart below is of Nifty, all the ones above are Sensex]

That said let me come to the conclusion. All the bear markets retraced 70% of the previous rise in a bear market. All bull market corrections were 25-30%. So anyone who says 20% is a bear market ask him what he is smoking. Many times such analysis is based on what some hedge fund defined based on S&P or other index. But we are discussing India and Indian stocks have their own dynamics, and 20% correction in a year to 8800 would be a buying opportunity and not a bear market.

The use of Elliott wave analysis can tell us in advance if a bear market of larger magnitude is possible or not. And that can allow us to better manage risk or be prepared for it. My charts have been calling this period an economic winter that in Nifty terms was a 5th wave since 2010 that has stretched out in time. But in 2015 despite my calling the Modi bubble a top, the Midcap performance cycle did not change from up to down, and the bubble went on. Now that cycle has ended for good and is not changing for years to come.

Can we get a bear market ? If yes then it will be a 70% retracement of 2009-2018 at approx 5100 Nifty as marked pink in the last chart above.
Too many things today ring bells of 1994. The NBFCs coming back. The public participation in SIPs, Thanks to the internet I cannot see them on the ''Bhav copy'', but the trains now run Advertisements of ''MF Sahi Hai'' everyday on the loudspeaker inside the compartments.

The Choice is Yours what you call the recent market crash!

I can only share with you the ''Truth About the Markets''

Please share this piece with everyone on the Bull and Bear market debate and 20% definition. Feel free to post arguments online as this article will feature under my economic updates on the website as well. Or catch me on social.

Share and enjoy the debate.

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Rohit Srivastava
www.indiacharts.com
For accurate market forecasting. Market forecasting is a study of past data to assess
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