Ajay Singh finds similarities between the 1990 - 1994 and 2003 - 2007 bull markets and subsequent price action. We found the same similarities, wrote about it in our newsletter to clients. I also explained this scenario in the Nagpur Investor Camp on April 25.
This is what the pattern is:
A 30% + gain in the Nifty over six weeks was recorded only once earlier in 1993. In 1993 the gains came after the a severe bear market in 1992-1993. After the gains, the Nifty consoliated for about 10 weeks. It then rallied another 27% to make a final bull market top in 1994, in about 10 months (the rally was slow and choppy). After this bull market top, the Nifty went into a four year trading range, touching previously made bear market lows.
This is what Mr Singh writes:
If we are talking about history, here is another piece of interesting history;
Check out the Nifty graph of the period 01/02/1990 to 28/02/1994 and you will see an almost matching graph as last 4 years:
Graph of 1990-1994
Graph og 2004-2009
Here are the similarities:
1). Nifty had a bull run from 300 to 1200 - that is 400% gain during 1990-1992, just like we gained 400% from nifty 1500-6000 during 2003-2007.
2). Then Correction/Bear Market started from the end of May 1992 to July 1993, exactly 13 months, just as current bear market from Jan 2008-March 2003, that is 13 months period.
3). In both bear markets, nifty gave 3 bear rallies, that is 3 tops with deeper corrections.
4). Both caused 55%-65% drop from the peak
5). After the 3rd drop, a rally started in July 1993 and gained 30% without a single day of correction in just 30 days period, similar to current rally that has gained 30%.
6). The index remained flat for the next 2 months during Sep-Oct 1993, and we have been flat for 15 days now and accordigly another 1-2 months we could remain flat around these levels.
And now here is the surpise, as to what comes next?!! Check out what happened after that! Surprisingly nifty rallied non-stop to the peak in the next 4 months, the complete bear market drop was recovered and the market was back to its high. Only after it reached high, the actual volatile years (not "days") started and the market remained in a broad range for the next 4 years, after which a fresh bull rally started.
So do we have the same thing in cards now?!! Are we about to have amazing unbelievable ride back to nifty 6000, were most retail investors keep sitting on the side lines and the market keeps moving up, and the institutional investors panicing and keep jumping in with the cash they have been holding, causing an unstoppable rally back to the highs.
See the nifty chart between July 1993 to March 1994 if you can't believe such thing to happen!
So here is my theory; we are consolidating at these levels for the next one month or so, and then we breakout of the bear market charts and have an amazing rally back to the peaks of 6000 nifty in just 6-8 months. And only after reaching there, we will have the worst trading "years" of atleast 3-4 years where we will be unable to break the highs of 6000 and keep droping back to 4500, that is we will remain in the volatile years range of 4500-6000 nifty. Then after 3-4 years we will see a new bull run that will take us back to the twice of the peak, that is 12000 nifty in the next 2-3 years from the start of that bull rally. And well by that time we will complete the 8 years cycle and enter in the next bear market territory.
So why "Sell in May and Go Away", and miss the actually rally that's on the cards??!!Please let me know your comments about my theory, and if you feel this could be possible, you may publish my theory on your blog.
My Notes: Mr Singh has drawn an eight year path for the stock market. While scenario building is useful and neccessary, we should trade what the market is telling us, not based on our scenarios. Also, on the ligher side, another up move after the elections means a surprise result in the elections.!