On Friday, the 23rd of March 2018, markets fell by 1.2%. While this is not a significant fall, what was significant was the fact that this drove the draw-down of Nifty 50 from its highest close to over 10%, something we hadn’t seen since November of 2016.
In many ways, the recent trend of markets has been unique. While a 25% to 30% draw-down from the peak was seen once in two or three years before the crash of 2008, post the financial crisis, we have had only once wherein the markets closed below the 25% mark when measured from peak.
During the good times, markets discount bad news as if they don’t matter much but when the tide turns, no good news is enough for markets as they are grappled with one or the other bad news.
The trigger for this fall could be blamed on the Union Budget which levied Tax on Long Term Gains, but what is driving the bearishness has been the fear of a trade war between the United States and China.
Growth had stalled long back and yet for many a quarter, markets ignored the lack of growth as strong fund flow and positive sentiments gave a boost to markets. But now with sentiments turning grey, the focus has come back to valuations which can be seen as steep given the lack of strong earnings forecast.
PSU Banks which were hit hard by Non-Performing Assets received a booster dose when government committed to bringing in substantial capital. But that bullishness was quickly overridden by the surge in frauds that have come to light in the recent weeks
“The Darkest Hour is before Dawn” or so goes a saying and while based on history we cannot really suggest that this is the darkest period, the fact remains that many a new investor has received a surprise that they were least expecting.
The question on everyone’s lips is how deep market can go before it recovers and given that we aren’t soothsayers, one can never be sure. But while we may lack a crystal ball to forecast the future moves of the market, we can use data and tools available to make an intelligent guess.
Valuation:
Price is what you pay, Value is what you get is a favourite quote of Warren Buffett. Future returns have a very strong correlation to the value at which the market stands. When Indices are cheap, probability of losing money over the coming years is close to zero.
On the other hand, when markets are Expensive relative to history, the chances of losing money over the coming years greatly increases. Currently, Nifty 50 Trailing Four Quarters is at the 94th Percentile. What this means is the current valuation of Nifty 50 is greater than what has been seen 94% of the time in history
Breadth:
While the large cap Index has seen a correction of just over 10%, the breadth of the markets looks as if a hurricane passed over. The Median Draw-down from Peak across all NSE Stocks stands at 34%.
67% of all stocks are trading below their 200 day Exponential Moving Average.
The last time we saw breadth as worse as this was in early 2016 with Nifty down 25% from its 52 week highs.
Volatility:
The surprising element of this fall would be the lack of Volatility – both Realized Volatility and Implied Volatility. India VIX, the Index that is based on Implied Volatility refuses to budge higher.
Are we in a Bear Market?
When Nifty recently broke below the 200 day average, the market by one measure has entered the bear market. Confirmation of this fact will be when the draw-down from peak reaches 20%.
But as data showcases, with more than 80% of the stocks trading 20% or more from their peaks, much of the market has already turned sour.
From lower GST collections to fear of political vacuum if BJP is unable to come back to power in 2019 are among the many reasons that are driving markets lower. Crude Prices which were given up for dead once Shale Oil started to pump out oil has bounced back and now well above $60. With India being a large importer, this will add to the already booming current deficit.
Since there has never been a time when there hasn’t been bad news, should we discount the same and jump in hoping that over time, much of these challenges will be forgotten in due course?
Markets usually bottom out when investors panic and that is something we are yet to witness this time around. Mutual Fund inflows have never been stronger as more investors pump in money in an attempt to maximize returns for their savings.
The Dow and the Nifty
Nifty 50 has in the last 6 years been closely tracking Dow Jones Indices and this fall has been no different.
Politically, the next big trigger for markets will be the results of the Karnataka Elections. One should expect markets to remain weak but choppy with the only change coming in companies which are able to surprise the markets positively when they report the Q4 results in April.
If the trend is your friend, the trend has turned. Should one should bail out or add more depends on one’s estimate on how the future will pan out in the coming days and weeks. A 10% fall isn’t a once in a blue moon opportunity yet expecting every crash to be similar to the one in 2008 will only result in opportunity costs as many a bear have experienced over the last few years.
A Market Crisis has and shall always remain good opportunity provided you know what you are doing. Whether this fall is an opportunity or a sign of further danger, we will know only in hindsight.
