2020 will certainly go down in market history as one of the most volatile years from stock market perspective. Never did anyone dream of a 30% drop in frontline index like Dow Jones in a matter of 2-3 weeks. To get a perspective of the severity of decline, have a look at the below chart which shows all the declines > 20% which Dow Jones has had.
Dark pink is 2020 fall which has been the steepest. Algorithmic trading is causing havoc & things get sold off in matter of seconds.
In my previous blogpost I had mentioned that get used to see days of 4-5% index moves.. reason has been increased volatility. But one thing that I never thought is for Nifty to break 10,000 so easily. This was 200 weekly moving average which has been broken only once since 2003. viz. in 2008. It went off like a flash !!
Lesson learnt: When it's a bear market, supports hardly matter.
The volatility was so high and can be seen from below daily moves in S&P 500.
9th Mar -7.6%
10th Mar +4.9%
11th Mar -4.9%
12th Mar -9.5%
13th Mar +9.3%
Friday, 13th March was an unprecedented day in Indian markets. After being 9% down on 12th Mar, Nifty opened gap down and hit lower circuit of 10% at 8555. Trading was halted for 45 mins. This has happened only thrice. 2003, 2008 and now 2020. So all those who saw it live, congrats, you have witnessed history being created in front of your eyes. It was panic selling with many stocks large caps as well down 10-20% with very low volumes. e.g. Kotak Bank down 20% with only 50 cr turnover.
After trading opened, index recovered and closed around 9950 levels. Imagine a 16% swing on Nifty in a day !
Why is this happening ?
Corona virus will have a profound impact on world economy. There are shutdowns and it will give a big jolt to the consumption. Imagine malls, multiplex, restaurants are closed. Tourism has come to a halt (not even a slowdown). Worldwide markets are factoring this and falling like house of cards. There is asset liquidation worldwide which hasn't happened since 2008 ! That is one reason, market didn't bother about 10,000 level on Nifty.
Equities, Gold Silver, Bitcoin, Oil, Treasury 10Y.. everything is correcting like world is coming to and end. See the chart below. Market simply ignored the stimulus given by FED of USD 1.5 trillion.
Corona virus has been spreading like crazy if not contained initially. See the chart below.
Now biggest challenge is that US and European countries are not taking lessons from China and are not shutting down immediately. e.g. When Italy took a decision to shut down, infection had already spread a lot and it spreads exponentially if not contained.
Will we have a V shaped recovery when Corona goes away ?
There is another school of thought that says that this is temporary. I really hope it is temporary because like everyone, I'm also worried about my near and dear ones. But the argument that there will be a V shaped recovery looks bleak. Imagine what effect the shutdowns will have on businesses. Sectors like Aviation, Tourism will be the ones to get hit first. There will be bankruptcies. Yes, you heard it right. There will be. Operating leverage works in reverse direction as well.
See this article with the first airline on track to go down. Norwegian Airlines
Quote from the article. The airline’s CEO, Jacob Schram, did not disclose the amount that is being sought from Norway, but has said that the airline requires help “within weeks, not months.”
Also once the momentum of consumption is slowed down, it does take time to get it back in track. Remember Bird flu ? Even after it had vanished, it took time for folks to get back to consuming poultry products. Why ? It's because of fear. Even if the rate of infection comes down a lot, still we won't see people roaming on streets freely. There will always be an element of fear in their minds to go into crowded areas. Also these bankruptcies will cause job losses, so there will be a spiraling impact on the consumption.
As a market participant what should be the course of action. ?
Needless to say, we are already in a bear market. Now looking in hindsight, probably some sign were visible that we were at the top. But unfortunately these look like regular things when bull market is ongoing. Many including me are surprised at the speed of the fall. But if I look back at the charts of 2008, it looks pretty similar.
Nifty 2008 fall: (using weekly charts)
7th Jan 2008 - 6337 to 21 Jan - 4420. A fall of 30% in straight line.It then bounced back to 5560 on 1st Feb. A 25% rally from base ( 60% retracement of earlier fall)
Now many chartists including me will come up as to why 8885 was the perfect support for Nifty. But that's all in hindsight. When Nifty was falling like pack of cards, no one had an idea as to where this will stop !
Now bear markets generally move in a downward A-B-C pattern. The current fall (4000 points on Nifty) we saw is wave A. Wave B will be the retracement of the fall and generally retraces 50-60% of the fall.. i.e. it should rise 2000-2500 from bottom of 8555 which gives us levels of 10,500-11,000 on Nifty. Post that we should come back to test bottom of 8555 and then if that breaks there will be further downside. How fast this will happen is anybody's guess. Bear market generally retrace atleast 50%-60% of the overall advance. So if we see from 2200 (bottom of 2009) till 12500 (top of 2020), we have seen an advance of roughly 10,000 points. So correction of 50-60% means we could see index levels of 6300 odd which coincidentally was also the top of 2007, 2011, 2013 & 2014. Below chart has the figures mentioned above.
In current downfall, Nifty has taken support at 38.2% Fibonacci retracement. The level around 6300 which I mentioned is 61.2% fib retracement level. Hope so we don't see it !
What is the next course of action ?
As mentioned in my previous blogpost, one thing you should have done in the current fall is to move your portfolio into stronger stocks which bounce back with each rally that the market witnesses. The current rally can be used to move to cash to a level you are comfortable with. Avoid putting in additional capital at the moment & understand that cash is also a position.Return of capital is more important than return on capital !!
When will above scenario change ?
If SPX crosses 3100 on upside & stays there for a week or so, this entire scenario will get negated and we can go on to hit new highs.
Overall we should get ready very high volatility & avoid constantly watching your portfolio on each down fall.
One thing is for sure, with so many couples working from home, there will be increase in divorce rates or there will be a baby boom around Dec 2020 !!
Disclosure: I am not a SEBI registered investment advisor. The content in this blog are academic in nature, please consult your investment advisor before taking any investment decision; I may have position in stocks discussed on the blog
Dark pink is 2020 fall which has been the steepest. Algorithmic trading is causing havoc & things get sold off in matter of seconds.
 |
| Dow Jones draw down > 20% |
In my previous blogpost I had mentioned that get used to see days of 4-5% index moves.. reason has been increased volatility. But one thing that I never thought is for Nifty to break 10,000 so easily. This was 200 weekly moving average which has been broken only once since 2003. viz. in 2008. It went off like a flash !!
Lesson learnt: When it's a bear market, supports hardly matter.
The volatility was so high and can be seen from below daily moves in S&P 500.
9th Mar -7.6%
10th Mar +4.9%
11th Mar -4.9%
12th Mar -9.5%
13th Mar +9.3%
Friday, 13th March was an unprecedented day in Indian markets. After being 9% down on 12th Mar, Nifty opened gap down and hit lower circuit of 10% at 8555. Trading was halted for 45 mins. This has happened only thrice. 2003, 2008 and now 2020. So all those who saw it live, congrats, you have witnessed history being created in front of your eyes. It was panic selling with many stocks large caps as well down 10-20% with very low volumes. e.g. Kotak Bank down 20% with only 50 cr turnover.
After trading opened, index recovered and closed around 9950 levels. Imagine a 16% swing on Nifty in a day !
Why is this happening ?
Corona virus will have a profound impact on world economy. There are shutdowns and it will give a big jolt to the consumption. Imagine malls, multiplex, restaurants are closed. Tourism has come to a halt (not even a slowdown). Worldwide markets are factoring this and falling like house of cards. There is asset liquidation worldwide which hasn't happened since 2008 ! That is one reason, market didn't bother about 10,000 level on Nifty.
Equities, Gold Silver, Bitcoin, Oil, Treasury 10Y.. everything is correcting like world is coming to and end. See the chart below. Market simply ignored the stimulus given by FED of USD 1.5 trillion.
 |
| Asset wide liquidation |
Corona virus has been spreading like crazy if not contained initially. See the chart below.
 |
| Exponential growth of Corona virus |
Will we have a V shaped recovery when Corona goes away ?
There is another school of thought that says that this is temporary. I really hope it is temporary because like everyone, I'm also worried about my near and dear ones. But the argument that there will be a V shaped recovery looks bleak. Imagine what effect the shutdowns will have on businesses. Sectors like Aviation, Tourism will be the ones to get hit first. There will be bankruptcies. Yes, you heard it right. There will be. Operating leverage works in reverse direction as well.
See this article with the first airline on track to go down. Norwegian Airlines
Quote from the article. The airline’s CEO, Jacob Schram, did not disclose the amount that is being sought from Norway, but has said that the airline requires help “within weeks, not months.”
Also once the momentum of consumption is slowed down, it does take time to get it back in track. Remember Bird flu ? Even after it had vanished, it took time for folks to get back to consuming poultry products. Why ? It's because of fear. Even if the rate of infection comes down a lot, still we won't see people roaming on streets freely. There will always be an element of fear in their minds to go into crowded areas. Also these bankruptcies will cause job losses, so there will be a spiraling impact on the consumption.
As a market participant what should be the course of action. ?
Needless to say, we are already in a bear market. Now looking in hindsight, probably some sign were visible that we were at the top. But unfortunately these look like regular things when bull market is ongoing. Many including me are surprised at the speed of the fall. But if I look back at the charts of 2008, it looks pretty similar.
Nifty 2008 fall: (using weekly charts)
7th Jan 2008 - 6337 to 21 Jan - 4420. A fall of 30% in straight line.It then bounced back to 5560 on 1st Feb. A 25% rally from base ( 60% retracement of earlier fall)
Now many chartists including me will come up as to why 8885 was the perfect support for Nifty. But that's all in hindsight. When Nifty was falling like pack of cards, no one had an idea as to where this will stop !
Now bear markets generally move in a downward A-B-C pattern. The current fall (4000 points on Nifty) we saw is wave A. Wave B will be the retracement of the fall and generally retraces 50-60% of the fall.. i.e. it should rise 2000-2500 from bottom of 8555 which gives us levels of 10,500-11,000 on Nifty. Post that we should come back to test bottom of 8555 and then if that breaks there will be further downside. How fast this will happen is anybody's guess. Bear market generally retrace atleast 50%-60% of the overall advance. So if we see from 2200 (bottom of 2009) till 12500 (top of 2020), we have seen an advance of roughly 10,000 points. So correction of 50-60% means we could see index levels of 6300 odd which coincidentally was also the top of 2007, 2011, 2013 & 2014. Below chart has the figures mentioned above.
In current downfall, Nifty has taken support at 38.2% Fibonacci retracement. The level around 6300 which I mentioned is 61.2% fib retracement level. Hope so we don't see it !
 |
| Fibonacci supports - Nifty |
Another reason why the recent bottom of 8555 is important is captured in below chart.It is 100 moving average on monthly charts where Nifty also took support in 2008.
 |
| 100 monthly average - Nifty |
As mentioned in my previous blogpost, one thing you should have done in the current fall is to move your portfolio into stronger stocks which bounce back with each rally that the market witnesses. The current rally can be used to move to cash to a level you are comfortable with. Avoid putting in additional capital at the moment & understand that cash is also a position.Return of capital is more important than return on capital !!
When will above scenario change ?
If SPX crosses 3100 on upside & stays there for a week or so, this entire scenario will get negated and we can go on to hit new highs.
Overall we should get ready very high volatility & avoid constantly watching your portfolio on each down fall.
One thing is for sure, with so many couples working from home, there will be increase in divorce rates or there will be a baby boom around Dec 2020 !!
Disclosure: I am not a SEBI registered investment advisor. The content in this blog are academic in nature, please consult your investment advisor before taking any investment decision; I may have position in stocks discussed on the blog
This comment has been removed by the author.
ReplyDeleteYour blogs are surely assisting to think on the stock market.
ReplyDeleteHence keep going !
It's surely is helping beginners like me :)
Good article. No matter if some one approve them or not. Writing it down clear your head and make space in your mind.
ReplyDeleteAlso, it is great bookmark for future. You can come and see what was your thought process and what actually happened.
Good analysis.
ReplyDelete