Saturday, June 28, 2008

Markets fall Again: How low is Low ?

Well, this reads like a deliberate tongue twisting line: How low is low. But it was not written to test your clarity of spoken English. I just thought about the idea that markets will continue to fall indefinitely, then penned this headline.
I have good company on CNBC as fundamental analyst after fundamental analyst appears on their shows and then says with a poker face: this is not the time to buy. They are quite correct, but I never thought I will see the day when a fundamental analyst actually gives a call to stay away from the market. The idea that all of the public money is staying away must be quite horrifying for them. But, they are bearing the pain with great fortitude.
Now, the above lines have been written in a light vein. Please do not take it seriously. All of the analysts are good friends and fine people.
Did I write: the markets will continue to fall indefinitely ? Dont you think so, given the absence of optimism ? Fortunately for us, stock markets represent an asset class that is not going to become zero. Individual stocks can become zero or almost zero, but not the market. This means, the bear market will end before the Nifty reaches zero. While not very comforting, at least it gives a starting point on where the bear market could end - above zero. Let us carry this reasoning further. Not just zero, stock markets will have a value. The top of the market before the 2001 - 2003 bear market was 1818 in Feb 2000. This level should provide support on any new bear market decline. We now have a number - the Nifty is likely to find support at the highs of the 2000 bull market - at 1818. I am not suggesting that the Nifty will fall to 1818 - I am just saying that this level provides support and the Index is unlikely to go below it.
The Nifty has closed at 4136, down from the lofty highs of 6350 seen just five months ago in January 2008. We are down by 2214 points. Now, if the Nifty were to fall all the way to 1818 we would decline by another 2318 points. Thus, in the most terrible scenario, the next leg of the decline will be equal to the decline of what we have already seen.
This becomes better. It is fair to suggest that the Index may not go down all the way to its year 2000 highs. Since then, positive fundamental changes have taken place in the Indian Economy. Thus, the Index is likely to find its bear market bottom at a level that is higher than 1818. This means, the next leg of decline in the ongoing bear market is going to be less than the decline which we have already seen in the past five months.
We will not go into the forecasting business. We are traders, not fortune tellers. Let the market falls wherever it wants to. For us, the larger part of the decline is probably over.
It is difficult to suggest that the decline is over and done with. We have no evidence till date. On Friday, the Nifty hit a 10 month low - this is not the sign of a new bull market. Therefore, investors must stay away fom this market. They should also treat all rallies as deceptive bear market rallies unless the first sign of a bull market emerges - a higher low.
To our original question: How low is Low - the answer is that it is probably higher than 1818.