Is This the End of Bear Market?

Greed and fear are the two most powerful emotions which drive the markets. The market offers the best opportunities when it swings to either of these two extreme emotions.

Nifty 50 is down by about 18% from its October 2021 high of 18,604. The mid-cap and small-cap indices have fallen more than 20% and entered the bear market.

Now the question on everyone’s mind is that is this the end of the bear market or will we fall further? To answer this question let us understand how you can measure these two emotions of greed and fear with the help of numbers.

The fall of Covid-19 is a classic example of fear gripping the markets. When a stock trades above its 200-day moving average (DMA) it is considered to be in a long-term uptrend. When most stocks are trading above their 200 DMA it is considered a bull market.

During the Covid lows, only 10% of Nifty 50 stocks were trading above their 200 DMA. This was the lowest level recorded since 2015. There was an extreme level of fear in the markets. And guess what… that’s where the markets bottomed.

% of Nifty 50 Stocks trading above 200 DMA

Nifty50 Update 30 March 2022

Source: Chartink

The situation today is like what we observed during the pandemic. On June 20, 2022, only 14% of the Nifty 50 stocks closed above their 200 DMA which has been the lowest in the last eight years excluding the Covid-fall.

Apart from this, the PE of the Nifty 50 is now trading at 19.07 which is below its median level of 20.48. During the Covid lows, Nifty’s PE had hit a low of 17.15. Nifty’s current PE is up only 11% above its Covid lows. If you consider the current WPI inflation of 15% then Nifty is already trading below Covid valuations.

Behavioral aspect is also indicating an extreme apart from fundamentals and technicals. The sentiment in the market is so pessimistic that google searches for the word “bear market” has recorded the second-highest readings after the Covid outbreak.

Trend of Word “Bear Market” on Google Trends

Nifty50 Update 30 March 2022

Source: Google Trends

All of this suggests excessive fear and pessimism in the markets. Now, what should you do when there is too much fear? Warren Buffett would say to be greedy when everyone else is fearful.

Just 2 months after the Covid fall, the index witnessed a staggering return of about 32%. A year later the Nifty 50 index had almost doubled. It was one of the fastest rallies in a year in Indian markets.

From where we stand today, one would be skeptical while investing. But the risk-to-reward ratio is very attractive. The downside risk seems limited from here. We might be closer than we think for yet another GREED ride.

Market participants can consider this as a buying opportunity to accumulate sound stocks with robust fundamentals, free cash flows, and less leverage for a longer horizon while ignoring the short-term hiccups.

Technical Outlook

Nifty 50 index closed positive after trading in a choppy manner for the entire week. It has formed a bullish harami candlestick pattern on the weekly charts. Market sentiments are mostly on the negative side as every bounce is getting sold into. However, the Nifty is getting rejected at lower levels which also coincides with the falling channel support.

Many major global indices are witnessing a bounce from falling support on similar lines. This hints at a possibility of a brief bounce-back rally. We suggest traders maintain a neutral to a mild positive bias as long as the Nifty does not break below the immediate support of 15200. Immediate resistance is now placed at 15900.

Nifty50 Update 30 March 2022

Expectations of the week

Markets could be influenced by an eventful economic calendar in the coming week. To start with, all eyes would be on US quarterly GDP growth rate numbers. If US registers negative growth then it will officially enter a recession which can dampen the market sentiment.

Back home, the auto sales numbers will continue to drive stock-specific movements on D-street as investors try to decode the future trend.

Further, whipsaw movements in the indices may be witnessed due to the monthly F&O expiry in the second half of the week. In the midst of volatility, investing in fundamentally resilient stocks in a phased manner would be a good approach. Nifty 50 closed the week at 15,699.25, up by 2.65%.

Expensive diversifications: Constructive or destructive?

Strategic investments, especially mergers and acquisitions, have become the new fad in India as companies with deep pockets shell out huge amounts to pursue inorganic growth. This frenzy is witnessed across sectors, with recent major investments seen from paints & cement to media & entertainment, from transport logistics to pharma. The aim is to be at the forefront of capitalizing on the market’s emerging opportunities. With the intent to rapidly scale, many companies are paying astonishingly high premium prices for acquisitions. Moreover, most of these plans are solely being funded with debt, making certain deal values more questionable. In this context, history does force us to ponder on whether these plans as well as the premiums paid are justified?

While any capex plan that yields value to the company is an investment, a failed capex leads to a sunk cost that ultimately is borne by the shareholders of the company. If a firm hits the bull’s eye by recognizing the right opportunity, it may bolster its prospects, lead to deeper market penetration, aid in driving return ratios upwards and be accretive for shareholders. However, the scenario can turn quite ugly if the capex doesn’t result in desired outcomes. In fact, such a plan, especially when it is in a sector where the company doesn’t have core competency may even become a distraction and may also paralyze it from making any other investment that could reap higher rewards. Another spillover of such plans is that they tend to intensify the competition and cause FOMO among the existing players, which eventually leads to more capex than required.

Along with questions of poor capital allocation, such plans need more scrutiny especially when companies resort to debt as a source of funds to honor the deals and promises. As evident from one of the past leaders in the wind energy space, if things get tricky, the firm eventually ends up in deep trouble, bogged down under a mountain of debts and uncertainties, with a question of sustainability in the future. A similar consequence was witnessed when a media major in the past forayed into the infra sector while it was hot and ended up defaulting on credit payments leading to massive wealth erosion for investors.

So the key here is that investors need to be very cautious while investing in such companies. Over the long run, very few companies have been able to successfully diversify into unrelated sectors and make good returns for their shareholders. As a result, investors should carefully evaluate such plans, check the debt levels of such companies, and especially in trying times like these stick to investing in efficient companies that are able to sustainably generate higher return ratios.

Technical Outlook

Following weak global cues, Nifty 50 closed this week on a sharply negative note. The index decisively has broken below the crucial support of 15,700 and this implies that further downside from here. While the market sentiments are highly bearish the indices have become oversold in the immediate to short term. Even the major global indices are trading at the falling channel support. Therefore, a brief short- covering bounce cannot be ruled out. We suggest traders maintain a mild negative to a neutral outlook going ahead and use any bounce as an exit opportunity. Immediate support and resistance are now placed at 15,200 and 16,200 respectively.

Nifty50 Update 30 March 2022

Expectations for the week

Indian indices are expected to be jittery, moving in tandem with weakness in the global peers as investors remain concerned about sky-rocketed inflation. Given the lack of major domestic events and the continuing dominance of global macros, market participants will keenly monitor the movement in the dollar index, crude oil prices and development of the Covid situation in China as well as India. With S&P 500 as well as our banking index officially in the bear market territory, fear will remain elevated. Investors are therefore advised to remain cautious and to initiate making small selective investments in fundamentally superior companies that are available at reasonable valuations. Nifty 50 closed the week at 15293.50, down by 5.61%.

A time consolidation awaits us?

The markets remained sluggish throughout the week as the rate hikes and inflationary pressure continued to be a major drag. Theoretically, demand-side issues are tackled by the central bank through monetary policies while, the supply-side ones, are via the government’s fiscal measures. However, in the real world when there is a crisis, its cascading effects are felt across borders, sectors, and segments, and more often than not, a combination of fiscal and monetary policies are implemented.

Since the onset of the pandemic, RBI and the government have turned into brothers in arms, and their united efforts have continued even to combat the unparalleled inflation being witnessed currently. While it was widely anticipated that RBI will raise rates and push the brakes, even the government has stepped in and altered import duties to power up the fight against inflation.

This is not the first time such a partnership has taken place. In 2013, when the inflation rates were hovering in double digits, the RBI increased repo rates and the government put import restrictions on gold and metals. A similar coalition was witnessed in 2018 as well. Post both these instances, the stock market went up by ~50% and ~20% respectively in the following year.

So while history does provide some hope for stock markets, it should not be mistaken that every time when there has been a policy mix the results have been positive. During the global financial crisis, those countries that combined both the fiscal and monetary policy measures either ended up with a sovereign debt crisis or high inflation later on. For instance, the European Union did face a debt crisis in 2011 and consequently, the London Stock Exchange did enter into a brief bear market. Therefore, there is no one magic formula to tackle any financial crisis and the success or failure depends upon the dynamics of the situation.
Currently, India’s major focus has been on curbing inflation but at the same time not aggressively hurting its growth and fiscal deficit. Therefore, our stock markets have been comparatively resilient thus far. However, in the wake of constantly changing global macros and the increasing risk of a global recession, it is difficult to judge whether the combined efforts will bear positive results. Amid this uncertainty, it is highly likely that markets will continue to sway sideways and that a time consolidation awaits us.

Technical Outlook

Nifty 50 closed this week on a negative note, majorly in line with global equity indices. Currently, the Nifty seems to be heading towards the support zone between 15900-16100 levels. Even though this week’s trading patterns hint at the risk of further downside, the overall bearish momentum has slowed down as the Nifty is now trading above the falling resistance line. Taking into consideration these factors, we suggest traders maintain a mildly negative to a neutral outlook going into the next week. As long as the Nifty does not break below 15,900, there is still a good possibility for an up move up to 16,800 levels.

Nifty50 Update 30 March 2022

Expectations of the week

The upcoming week is going to be a roller-coaster ride as a host of important events are slated to release. To begin with, all eyeballs will be on the CPI and WPI Inflation rates and the markets will have a keen eye on whether the import duty restrictions and rate hikes have positively impacted the same. Further, the data on India’s balance of trade will be avidly tracked as India’s trade deficit widened to a record high level of USD 23.3 billion in May 2022. Globally, Fed’s interest rate decision can trigger jitters in the global markets. Investors are therefore advised to be cautious and stay on the sidelines till a clear direction emerges in the market. Nifty 50 closed the week at 16,201.80, down by 2.31%.

Are Moats a thing of the past?

Uncertainties, surprises and shocks have pretty much dominated both, the stock market and the business environment in the past two years. The norms of business are changing rapidly and disruptions have become the new normal. While competition has also been a threat to most of the businesses, this time around the different aspect is that competition is not only intra-sector but inter-sector as well. With the recent announcement of the cement biggie entering the paints segment, a transport logistics major planning to capture the cement market, it seems that not only the smaller players but the well established market leaders are also being challenged. Consequently, considering the fact that many investors invest in the market leaders, there is increasing nervousness among them of whether or not they should remain invested in such companies.

To answer this, firstly it is important to recognize that there is one common trait across all market leaders and that is the possession of economic moats which help them sustain their leadership and expand it as well. Warren Buffett has repeatedly advocated that the most important factor to pick a successful investment is judging the durability of a company’s competitive advantage or popularly called the “moat”. This is important because companies with economic moat(s) sustainable for long term are better able to castle the storm and also more likely to handsomely reward shareholders.

So essentially, at this stage it becomes imperative to judge whether or not the market leaders that one holds from long term perspective have economic moats that are sustainable or are narrowing day by day. Secondly, history also suggests that, while there are classic cases of successful disruptions, many large companies have also failed to penetrate into new segments. So currently while we are witnessing disruptions in spaces which were presumed to have high entry barriers, the market leaders will need to continuously innovate and strengthen their moats to stay relevant. The focus will now shift from ‘expansion of market share’ to ‘protection of market share’. On the other hand with so many fishes in the pond, it seems that the smaller players will have to drive the wave of consolidation, else they may be the first ones to get weeded out.

Essentially it all boils down to the classic Charles Darwin’s quote “the survival of the fittest”. Irrespective of the environment, the formula for a winning business does not change. It is at times like these where the “moat” of the companies is truly tested. So while it will take a long time to actually know who wins the race, investors should carefully keep tracking how market leaders fare in times of disruptions as this will enable them to evaluate their investment decisions.

Technical Outlook

Nifty 50 index closed on a positive note for the week, confirming that a short term minor bottom is in place now. In line with global benchmark indices, Nifty is also heading for an immediate resistance breakout indicating that the short term trend is bullish. Having said this, there are no concrete evidences that the correction phase has ended. Considering this, we suggest traders maintain a mildly bullish outlook going ahead and follow stock specific buy-on-dips approach. The next immediate resistance level for Nifty is now placed at 17,400.

Nifty50 Update 30 March 2022

Expectations of the week

The upcoming action-packed week is filled with a host of events on the cards. To start with, all eyes will be on RBI’s MPC meeting as market participants will try to decode what’s in the store for the economy. Given the central bank’s rate-hiking spree to quell the red hot inflation in India, streets are pencilling in a 35-50 bps repo rate hike this time. Also, inflation statistics for China and the United States are anticipated next week, which might trigger jitters in the global markets. Investors are advised to cherry-pick quality stocks in resilient sectors and invest in a staggered manner. Nifty 50 closed the week at 16,584.30, up by 1.42%.