Mkts may not see pain receding

Its changed life for the equity markets though and like we were discussing over the past 48 hours is it smelling of capitulation?

It certainly is looking like that and one needs to look outside the Nifty because the Nifty is not falling so much as stocks outside it and that is where the capitulation is happening. The Nifty may have fallen in the last couple of days from more than 4,200 to 4,000 but that’s just scratching the surface of it. So many stocks have fallen 15% over the last couple of days; largecap names, midcap names have lost 15% of value even after the kind of damage they had seen earlier, that’s absolutely astonishing with the ease with which not just big stocks even the trading stocks, all the momentum stocks they have lost 15-20% since Friday. So I think there is certain sense of capitulation which is going on no question about that.

Typically when one sees this kind of panic one is tempted to go out and say, “Now we are coming to the end of the problem.” and that may well be the case; the problem is that we all have been talking about this technical pullback for the last one week and it’s just not materialising. I do not know whether there is a lot of panic from the larger holders of stocks, not just local retail who are selling and that’s what leading to this kind of damage in prices. It’s difficult to pinpoint whether we are going to turn around from somewhere here.

But at this point, I think if one is a trader one needs to be a bit careful if one is trading short because one of these days the market will whipsaw you. I do not know whether it does it today, it takes down to 3,900 before it whipsaws or it takes one down to 3,600 before it whipsaws and that’s a difficult bit and its tempting to remain short in this market because one is making money everyday, so why would one cover up. 

But when one see the signs of Friday and Monday then one begins to become a bit cagy about how much more downside there could be in the near-term and the important thing to recognise is that we are only talking about a technical pullback here. Even if the market turned around from here would it be a long-term bottom for this market? It would be difficult to call that on current reckoning.

All one is saying is that it’s getting little overdone at this point in time, the ease with which stocks are falling 8-10% everyday. One of these days; I do not know whether today, day after, next week we will get a pullback and that might cleanout some part of your profits if one is short in the market because it is looking like panic and complete capitulation now. 

Is it a bear market?

For a lot of people I think it is a definition; people say what’s the big deal, if you call it a pause in the bull market, or you call it a bear market how does it matter. But I think it’s very different, it’s very important to recognize whether you are in a bear market or you are in a bull market.

We have had vicious corrections over the last couple of year’s corrections which have taken us down 25% on the index, those are not small corrections but at none of those points did it resemble a bear market like it has in 2008. Bear markets come with characteristics of their own, when you have deep corrections in bull markets those are buying opportunities and eventually bulls make money out of them. But in bear markets situations are quite different.

I think people are still deluding themselves by saying, no-no this is just a pause after three months stocks will bounce back. That’s like saying, you have got a scorching summer followed by a vicious winter and after that summer comes back again, do you then say that summer never ended or went away it was just a continuing summer, no matter when the winter came in.

I think we are in a bear market and we have to recognize it and when you take that call I think things become far easier in terms of your approach to the market because an approach to a bear market is very a different intrinsically than an approach to a pause in a bull market, and I think that’s the mistake a lot of people have been making for the last 6 months by thinking that this is just a small pause, you buy every dip and then the market will bounce back and you will make a lot of money. But you are not making that money by buying the dips in the markets.

I don’t know when this bear market ends, yes; its oversold is. The other thing about a bear market is that it will always give you phenomenal rallies, which is why I am saying that right now may be sometime in the next few days you will probably get a good trading rally and trading rallies are absolutely startling in their intensity in bear markets, they look better than bull market sometimes. So can the Nifty surprise here from 3,900-4,000 and give you a bounce till 4,800, 20% index rally that is meaningful, it can happen for sure would it take you back in to a bull market, no it will not but you need to be aware of the possibility of a rally of that magnitude which might come in, if you are trading the market short.

On both accounts one needs to recognize how to approach this bear market. Firstly don’t get lulled into thinking that long-term bottom is being formed at a particular level because in bear market stocks usually surprise on the way down. But when you have spells of getting oversold like you have over the last couple of days then one must prepare for those bull market rallies, which if you are not aware of or are open to then you can get cleaned out very easily.

The only way for the bulls to make money in bear market is to trade those kind of strong rallies, which come and I think one of them is coming, I don’t know whether it is coming today or it is coming at 3,900 but one of them is coming one of these days for sure.

Aside from capitulation-is there a need for a big shift in mental make up as well? Price damage is happening but other things will happen as well in a bear market’s fabric:

That is exactly what I am saying. One needs to shed this stocks have approached great value and need to buy; you need to stop this-I will make a lot of money if I just have a 9 month perspective from now because of course stocks will double from here I am buying at great prices; bear markets typically do not work like that.

The people who speak about all these things which is that great value has emerged quickly buy but they are not saying buy for a trading bounce they are saying buy and the bull market returns in three months and you make a lot of money out of that. I think that is not a sanguine view at least at this point to take because fundamentals have worsened significantly at this point. We are in a fundamental-led bear market not a technical-led bear market. The prudent thing is not to go about calling bottoms at every level, not to go into that value trap zones. We are still in a very weak situation for the market; I have no doubt in my mind that we are in a bear market. So we need to be extremely cautious about how we approach it now.