It is said that stock markets spend about 70 percent of the time in a range and just 30 percent of the time it patterns. Out of this 30 percent more often than not is spent in moving higher, while bloodbath happens all of sudden without giving time to think about.
Take the present market situation. The sharp fall in the overall market records invalidated 15 months of time and efforts of the market to reach another high. Markets are currently trading at levels last found in October 2018. The greater part of the 15 months of exertion to push markets higher has been lost in 13 trading days. More awful, the energy of the fall and the disarray in the market on different fronts doesn’t give any indications of bottoming out.
Fund flow, especially Foriegn Institutional Investors inflow, is not also appealing either. Emerging and deeloping markets have seen $6.8 billion being redeemed in January 2020 and $9.8 billion in February 2020. With very few hopes of on how to find to cure the virus and put an end to the oil price war, markets had currently entered in dangerous waters.
That brings us to the question of how to identify a market bottom. But first a caveat – it is nearly impossible to consistently predict the top and bottom of the market. What we can do is try to understand when does a market make a bottom and look out for telltale signs that predict a possible change in market direction.
The most significant thing is to follow where the real money will be going – particularly hard cash. There is no away from or check to gauge the development of shrewd cash, however we can get insights from the value developments of advantages where they are invested for a long time.
Gold has been a most loved goal of smart money being invested in the sparkling metal for quite a while. Gold ETFs have seen record cash being moved in notwithstanding lower real utilization of the metal for a long time.
A marker of the value showcase base will be when financial specialists begin booking their benefit in gold and putting this cash in different instruments. With low security yields across most nations, it would seem that cash will remain in non-enthusiasm paying places of refuge like gold and different valuable metals.
A second most used indicator to investigate the real movement of smart money is to look for the difference between market yield and bond yield. Market yield is approximately calculated as opposite of price to earnings (P/E) – that is earnings to price (E/P). To calculate market yield forward earnings are utilized.
Smart money always runs behind the promising yields or returns, while simultaneously looking for capital protection. Bonds or debt instruments offer them capital protection, though at the cost of yield. Equity investment gives better yield but little capital protection. The normal scenario is when equity yield moves above the bond yield which would make puuting money in stock markets worth the risk.
Let’s look at it in the current scenario. Nifty’s consensus Earning Per Share for FY22 was Rs 760, but this was before coronavirus and oil price shock hit the markets. It would be very defensive to assume a 15 percent (optimistic) discount to these earnings. At these discounts, the Financial Year 2022 consensus estimates works out to Rs 646. At Wednesday’s closing of 10,458 the price to earnings works to 16.18 times which is still higher than the 10 year average of 15.5 times.
As for the market yield based on the discounted consensus EPS, it is 6.18 percent which is higher than the 10-year bond yield of 6.12 percent.
Each time the market yield moves lower than the bond yield, real smart money begins moving towards value. The main time smart money postponed its development from bonds to value was during the financial meltdown of 2008 in United States. On pretty much every other event, value markets ricocheted back when the market yields fell insignificantly beneath bond yields or were near it.
A CLSA report titled ‘Anatomy of a market bottom’ points out that in only 3 of the past 10 bottoms, the Nifty earning yield went notably below the 10-year bond yield.
Passing by this rationale we ought to be heading nearer to the market bottom.
Brokers who utilize longer-term graphs like Alok Jain likewise feel that the Nifty is at a pivotal support level. The 200-week normal moving average has just been ruptured during the financial crisis.
Elliotticians feel that 9,900-10,100 is a zone from where markets can see a sharp U-turn or Dead cat bounce.
While pinpointing a market bottom is difficult, some of the tools that have been traditionally used to locate prices from where the market has reversed suggest we are closer to these points. But there have been outliers, like the financial meltdown, which can only be seen in hindsight. After all, the world, as well as the market, has never seen a pandemic like covid-19.