Has the market bottomed out?
Historical study of Indian Market Stock Crashes
Crash of 1992: reason associated: Harshad Mehta Scam
In April 1993 the index corrected from a level of 1280.92 to 599.51 i.e. a total drop of 53% however this didn’t happened in one go. The prices moves always happen in wave pattern, i.e. the move is never uni- directional.
So the fall of 53% happened in span of 12 months, i.e. April 1992 to April 1993. But this fall happened in phases i.e. after a fall there was a pullback, then a fall, then a pullback and so on, until the final bottom was made in April 1993, i.e. after 12 months from where the decline started, here is the following table which shows this cycle with time taken :
Thus there was a strong rise as well post the fall, but the rise never reclaimed the same top of April 1992.
However when the market bottomed out in April 1993 by touching a low of 599.51 i.e. a fall of 53% from April 1992 highs the market then rallied to 125% not only to reclaim the old high but even touched a higher level of 1349.49.
Crash of 2001: Reason associated: Dot com Bubble
In Feb 2000, post the dot com bubble, the markets corrected by 53% again in a phased manner in a span of 20 months. Similar to the earlier crash, an initial fall was followed by a pullback again a fall again a pullback, but here again the pullback never happened to reclaim the levels from where the fall started. Details of the same is as under:
When the market bottomed out in Sep 2001, after touching a low of 849.95 the market reclaimed and even touched a higher level of 2014.65 levels in Jan 2004 thereby registering a rise of 137% from the bottom levels in a span of 30 months.
Crash of 2007-2008: Reason associated: Global Financial Crisis:
When the market bottomed out in Oct 2008, after touching a low of 2252.75 the market tried to reclaim the Jan 2008 levels and touched a high of 6338.5 in Nov 2010 i.e. a rise by 181% from Oct 2008 lows and it took 26 months to touch the Jan 2008 highs.
Retail investors already have a FOMO (Fear of Missing Out) reaction. They feel they have missed the bus, and start buying at current levels, only to see another fall from the pullback levels.
Remember historically we saw it takes anywhere between 10-20 odd months for a bottom formation.
So don’t be in a hurry to exhaust all your capital immediately, however as a smart investor, you could have deployed some capital on fresh sound companies at 7600-8000 levels and it would have yielded a return of 20% from the lows & booked out now.
However there is no point of investing LUMPSUM at 9500-10000 levels only to see that the pullback will soon be sold into.
Because historically there were minimum 3 down legs each followed by a sharp pullback, so far we are witnessing the first pullback.
I have tried to explain this backed with data, so that you don’t have to trust anyone but on the data - the historical pattern.
Market works in cycle:
One more important thing is that Markets witness sell off, recession comes in after every 8-10 months. The Virus has been around since Dec 2019, however the market witnessed a massive selloff in late Feb 2020 as it was at overbought condition.
Ofcourse whenever there is a selloff journalists find a reason. Hence they have associated the reason to COVID-19.
How to make use of this opportunity?
Now getting to main point , no one knows how long it will take for a bottom formation, and how low the Nifty might go, but historically we have seen 53% decline from All time High (ATH) and in 2008 the same was 65%.
And if we compute a 53% decline from 12430 levels the same would come to ~6000 levels.
Also historically we have also seen the market rises 20–36% after a first steep fall and hence this is the part of rh pullback rally. But don't mistaken it for a bottom formation. Bottom formation never happens in a days time.
So what do we do, as retail investors don’t have time only to track market, they just seek advise from anyone yes, literally anyone, they seek advise from any random person could be their colleague, their friend, their dhobi, their pan wala, any random group, without even understanding that the person to whom they are seeking advice has any expertise or knowledge of the stock markets.
We live in a era, where before buying a bottle of shampoo, we will ask reviews on it from our friends who have used that shampoo, we even go and read all the reviews on various online shopping portal and after a detailed research of 2 days to a week’s time buy that shampoo costing Rs. 250-300 of bottle. But when it comes to investment, we don’t care about thousands and lakhs of value.
This attitude needs to change. Better hire a financial advisor after you are satisfied with their knowledge and past track record.
If your investment corpus is low, and you don’t have much knowledge then simple thing to do is, simply stick to SIP’s
SIP’s only in Index Funds
Because during all these historical market crashes, few companies has lost tremendous value and they wer not able to come back to their all time high levels even despite Nifty recovering after a span of 12-18 or 24 months.
So when you don’t have the expertise to cherry pick stocks in your portfolio, its best to invest in Index Funds. Because worst case scenario, companies might not perform or may even go belly up. However Index i.e. Nifty will never go to 0 or for that matter it will bounce back faster than individual company.
However in corrections like these, you can increase your SIP amount to gain on the dollar cost averaging. Or simply add into Index ETF’s every week (by dividing your monthly SIP amount). So that you never have to time the market.
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