Contours of a bear market

SMARTSHARE

Are we in a bear market? Different people will have different conclusions but one thing is sure: by the time it dawns that it is in fact in a bear country, it might be too late.

Most profitable actions in stock markets are taken with anticipation. That means acting on scanty available information and making use of the gut. If proven right, you reap a rich bounty, if you are wrong, the market punishes you.

If you wait for the information adequacy, your chances of going right increase but the quantum of profits you can make is reduced as the market moves in the meanwhile to react to the new information.

In the US, they define any fall in excess of 10 per cent as bear market beginning. Emerging markets may take 20 per cent correction as a benchmark.

As of Thursday, the Dow was down around 16 per cent from its October 2007 high. The Nikkei is down 40 per cent from its February 2007 high and Hangseng down 36 per cent from its October 2007 high. They are in a bear market.

In the emerging markets, Shanghai has dipped 20 per cent from its January high and India around 21 per cent. Both countries essentially meet criterion. But if we go by that, in India, we've seen two other instances besides the ongoing correction where the Sensex fell more than 20 per cent.

In 2004, the Sensex tumbled 32.4 per cent from a January high to a May low. That was the time when the NDA regime was replaced by the UPA. Another occasion when it tumbled more than 20 per cent was May-June 2006, when it fell 30.6 per cent.

While these falls satisfy the test of percentage fall, they do not satisfy the test of time. The longest running weakness in this rally that began in May 2003 has not lasted more than four months "" too short a period to call it a bear rally.

But we may be headed into one if you consider other evidence: Valuations were beginning to discount three year projections and you had IPOs at fantastic premium though the projects had a three year plus gestation, not counting the executional risk that such projects entail.

It was way back on February 7, 2007 that we talked of Three party poopers, where we argued that any ban or curbs on the issue of PNs could drive our markets lower.

In our March 17 story, we said the Fundamentals are deteriorating, where we argued why margins could come under pressure, and on March 31, under the title Irrational exuberance, we explained how US housing could derail the markets. It is only in the last one month that our markets have taken note of these developments.

Markets can continue to be irrational for a longer time than you can remain solvent. So, when you take a view contrary to popular belief at a given time, ensure that your losses are capped and the risk reward ratio is also commensurate.

Around 10 lakh new DP accounts were opened between mid-December and January-end as against around 1.5 lakh new accounts that were opened in a month. This huge influx of new-comers is a possible sign of a market top.

I am beginning to see some anecdotal evidences of a bear market as well. Somewhere in 1986, when weekly newspapers from Dalal Street were the only source of capital market information, one of the old hands appealed to readers of a paper that if every reader just bought 100 shares of Reliance, the markets could revive.

A similar appeal has now appeared on a website that if 8 lakh individuals buy 5 lakh worth of Nifty, they can absorb 50 per cent of the FII portfolio and support the market. Use the rallies to lighten commitments and book profits and don't look beyond immediate cash flows while valuing companies.