Friday, May 1, 2009

Sell in May ? Not this May!

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:

Dear Sir,

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.!

7 comments:

kunnu said...

Nice analysis Mr Ajay.Really its good to find that we are now in a position where if history repeats itself then we can see 6000 before end of this year. This will be very helpful for the current economic scenario. I would love to hear comments from Sudarshan Sir about your findings.

ashu said...

Dear Mr. Sukhani,

I read the aforementioned article as well as the earlier post that led to this article...

It does make for some very interesting reading and discussion, but I'm afraid it goes that far and no further from my standpoint. I am a professional trader and I have my own set of trading rules and set-ups. However, what I wish to state is that how many "investors" shall even endeavour to follow this theory is outside the realms of my imagination. One of the foremost technicians from whom I learnt many a lesson remarked that investors are traders who got caught on the wrong side of the trend. When it works, it is a brilliant piece of trading but when not, one is in it for the "long term"!!

I reckon that given all the wealth I may wish to make in this lifetime, I still would not be able to trade the information posted by our friend here. I find your fifteen minute rule far far far more useful and have incorporated that into my system of things. Many thanks.

As another great said... "Even if you print trading rules on the front page of every major newspaper, you will find that people will still go out and lose money the next day!!"

But, I repeat and with good reason... I speak with a bias of a professional and I prefer my trailing methodology rather than anticipatory trading. Any chart tell you its intention before it starts a major move.

Someone called this intention the "last gasp"

I look forward to reading more from you in the days to come.

Warm regards

Shashank Jogi said...

2 data points can hardly be termed statistically significant.

The writer is falling prey to the law of small numbers just like many amateurs do. He observes 2 instances where something occurred earlier and is using this limited data to predict the future, without considering the circumstances under which the earlier moves happened.

Now, the Nifty might go back to any higher level, we don't know that. But 2 data points cannot be used to develop any trading plan.

Finally, what if the markets do not move higher? How do you protect your capital?

stockchart said...

hello sir,one of the important golden rules that we learn as we try to learn the great subject of technical analysis,we must accept that -- history repeats itself --and other important aspect is MIMMICKING--,but here the guy is trying to draw a rosy picture,just by seeing similarities in only one leg..markets can do anything offcourse...but at this juncture 6000 in nifty in the next year or so seems too optimstic.and above all guessing should be avoided while predicting markets..bjnaik@hotmail.com

Tushar said...

It's a part of wishful thinking.
But then also
I would like to know the news flow at that time 92-93-94 that led to bear market and return to bull market highs?

If market had to rally in such a way now and return to 6000 Nifty then the only news flow I can see is BJP coming to power with clear majority and advani bringing back 7,00,000 crores or little less of black money back to India.

Rahul said...

This is Stock Market ..The Game

Here everyone can predict what's gone a happen but Not the specific
Date and Time yo Today is the day.

For June i think to me Heavy retracement is yet to come.
Those Bulls with make everyone think it's gone a be 4600 Nifty and Hit on x10000 lots of 30000 Nifty and make it back to 4100 ......Again this only me thats has this feeling

STOCKMARKET.COM said...

This is just copy of Vivek Patil's analysis nothing else...not any original thought/insight there.....and about Sudarshan what to say ...he is always on fence to jump on either side to prove himsef correct...but all TA's are required because common man not ready to analyse market on his own..thats why the products like Sudarshansukhani's analysis are running product in market and on blue channel...