• : December 4, 2020
  • : B. Krishnakumar

Has the Market Bottomed Out?

This is the question everyone of us in the markets have in our mind. The rapid rally witnessed last week in the Nifty makes us even more suspicious or may be convinced about the bottom being in place. This is just the psychological factor – fear of missing out or FOMO at play.

I have been reading lots of blog posts that discuss about this topic and there have been lots of statistical data about US markets. If you ask why US Markets? It is because US markets have a longer history in terms of authentic stock market data and their markets have witnessed a variety of events including the great depression, world war, pandemic etc.

Here are some interesting pointers from the various blog posts. Last week, the Dow Jones Industrial Average registered its best single day percentage gain since 1933. This is happening when the US markets have probably seen one of the quickest bear markets in history.

Here is an interesting data. Since 1993, the 47 of the 50 best and worst days in S&P500 index have occurred while the market was below its 200-day moving average. This is the data from this blog post.

The spike in volatility is a very common occurrence during panic fall. During the 2008 fall, the Average true range or ATR, expressed as a percentage of closing price, spiked to 15% in the weekly chart in October 2008.

While bottoming out phase started since November 2008, ATR% started cooling off and in March 2009 when the uptrend begun in Nifty, the ATR% dropped to 7.8% from the peak of 15% in October 2008. As of last Friday, the ATR% was at 8.6% in Nifty 50 index.

Typically, before the bottoming out phase is over, the momentum would slowdown and then the volatility would also cool off. Until we see these two occurrences, there is no point getting carried away about bottom being in place.

Price structure wise, we need to see a higher low and higher high in the weekly charts or atleast in the daily chart. The sudden and sporadic sharp rally is common during bear markets and it should not be confused as a bottom being in place.

When the index falls by more than 10% and spikes up 5% within a span of a week, it is not a healthy sign and it is not a sign of markets cooling off or bottoming out.

Nobody has any clue about the support or when the price will bottom out. It is better to be safe than sorry. If at all you are very itchy to buy, focus on quality large cap stocks with a clear-cut exit strategy. Better still, concentrate on Nifty index fund, again with a clear exit strategy.

Remember markets will be functional until we live and beyond that too. So, it is okay to miss out the first 15 or even 20 per cent bounce in the index. Wait for confirmation and if that means buying at a higher level from the bottom, it is fine. It is like paying the insurance premium. You might consider an insurance policy as waste of money until some contingency strikes.

In this context, it is even more important to realise the importance of having an objective exit plan and more importantly executing it. There will be instances where your exit will be triggered and the trend would resume, forcing you to probably buy back at slightly higher levels than youthe price you o survive tAhis kind of carnage.