Investing in Bear market !!

Market Euphoria and Panic

Consistent selling is happening across the stock market. Every rise is being sold into. Irrespective of the performance stocks are sliding down with no accumulation or buying in sight. Stocks are giving false breakouts only to further slide down after a few days

Market went from 7600 to 18600 jump of almost 150%. There was euphoria all around and all stocks were rising cycle by cycle be it Pharma sector, Banks, Auto stocks, Metal stocks everything was touching new highs accompanied by steep rise of Technology stocks. Many stocks were up 600-1400% from COVID lows

Is market expensive ?

Following chart shows the Nifty PE ratio month-wise average data as calculated by NSE

In 2020 market was already very expensive with PE ratio of 27.96 in the March 2020, Market crashed 38% and moved market PE ratio to low of 20.38 in April 2020

Again there was steep rise in PE ratio which increased as stock prices increased but earnings did not increase by same proportion, PE ratio topped at 40.8 in February 2021. Market kept on rising till October 2021

Since then we are in bear market territory and PE ratio is continuously declining. PE ratio currently in May 2022 is 20.32 which is lower than the COVID level in April 2020

So market is not that expensive and available at fair valuations

Currently market is trading just 28% higher than pre COVID high, this is just 28% returns in almost 2.5 years. Broader stocks are down even more than Nifty. Following table shows list of indices with % down from ATH and % High from Pre COVID high in JAN 2020

It is the psychology of investors to sell when market goes down and buy when market is going up. But earning money in stock market is less about smartness and more about controlling your emotions. You should be ready to go against the herd to earn money.

Following chart shows the psychology of investors across market cycles and it is same during every market crash

According to charts we can be somewhere near anxiety and denial phase. We are more of in the Anxiety phase and a New Low in Nifty would call for Denial and when you see Everyone shouting “Market toh gayo”, “Market=Gambling”, ”Sab Bechdo” know that we have moved into Panic Stage and we should be ready to lap into ideas.

Bear Market

Our market is in bear market territory since October 2021. Market which started dipping as normal correction seems to be going down continuously. There are few things that investors experience during Bear market

1) Leaders start going into correction – Breakdown of the Leaders of the previous bull market will start correcting at the start of bear market. Check charts of Laurus, Dixon, IEX, and Sequent. Breakdown of the leaders is one of the first indication of the long term pain.

2) Almost nothing makes money – No matter what you buy, no matter which cycle how strong fundamentals or technical are it becomes almost impossible to make money

3) Market turns from being a Buy on Dips market to a Sell on Rise Market – There will be hardly any strength left in the market. Stocks won’t sustain any upside while they would accelerate on the downside. Stocks will take support, consolidate and again break down to the next support. Look at the NASDAQ index and how it continues to slide down.

4) Valuations become fair – Stocks which were trading at premium valuations start to correct. Absurd valuations begin their journey towards normalized valuations (Correction can be seen in Consumer tech, IT, Chemicals)

What investors should do?

It is impossible to predict market movement and know when euphoria will start and market will start going down, before we even realize market will be down significantly and also we don’t know where market will stop correcting, levels can be predicted but there are too many uncertainties like Ukraine crisis, Inflation, Rising interest rates, Covid, Commodities shortage, elections etc.

What strategy should be adopted by investors in such scenario?

1) Hold Companies which have proven business model and have sustained Growth and Business fundamentals even in tough periods. Examples of such stocks could be Bajaj Finance, Asian Paints, Titan, Reliance and TCS. These stocks will be the first once to breakout once the tide turns. In case of severe market drawdowns investing in such safe stocks can give opportunity of making money with limited risk. No matter where market goes money will be recovered in such stocks

2) Sell or be cautious about adding weaker companies i.e. companies which have shown weak performance in last few quarters and stocks whose performance is likely to remain on lower side in next few months. These companies might take longer time to recover or many may not recover at all. So we have to be cautious while betting on such companies. They rebound only if the business fundamentals turn and market builds enough conviction which can take long time

3) Look for stocks which are giving rebound or technically strong, stocks which have not fallen below 200 EMA level, Stocks which shows rebound more than indices and fall less than the market are likely to sustain and provide less drawdowns.

4) Stop looking for stocks which are hitting new lows every day in hope of recovery but instead wait and let these stocks consolidate, let them take reverse turn to invest more. In case of panic selling many stocks will be available at significant discount but be wary of catching falling knifes

5) Cash is king – It is always wise thing to hold significant cash in your portfolio, in such market condition where market is already dipping since last many months, you are likely to exhaust all cash by investing in dips but when actual dip comes you are left with no money. So keep cash or utilize other income sources to generate cash in case market falls further. If you don’t have any cash left, sell weaker stocks, invest in stronger companies and forget about market for next few months

6) Keep your watch list ready of selected stocks to invest and monitor their levels, market will stop going down after certain point. We can’t predict bottom price but can bet big on selected stocks when available at significant discount (Say 30-40%)