Bear market rally or the start of a new bull market?

Bears and viruses show up without any prior notice.

No wonder bear markets often pull the rug out from under investors.

By the time you realize you are in a bear zone it’s often too late, like it happened this time too.

When markets started drifting downwards in the second week of March, many believed it was a healthy correction in a bull market. But then, we had nasty slides which confirmed the presence of mighty bears.

In reality, markets had grossly underestimated the universal nature of Coronavirus and didn’t anticipate a slowdown in the global economy on account of COVID-19. Nonetheless, this perception changed drastically and rather dramatically in March, driving investors’ sentiment to the other end of the spectrum. S&P 500 in the U.S. sifted into the bear zone within just 16 trading sessions—fastest ever.

The situation in India was no different. Nifty 50 witnessed a 25% loss in March alone.

Bear markets confuse you more with sharp and sporadic counter rallies.

From the lows of 7,500; Nifty jumped over 15% in no time.

If you too are confused as to how to position your portfolios in bear markets, this post is entirely for you.

First thing first…don’t get carried away by bear market rallies

It’s important to understand the tone and texture of a rally, to be able to decide the investing strategy—whether it’s a rally within the bullish set up or a rally in the bearish set up. In short, there are two layers to every rally—the upmove itself and the core trend.

Hopes of stimulus and the slowed pace of new COVID-19 cases globally have pushed markets northwards over the last few trading sessions. Short-covering has also helped. Nonetheless, nobody still knows how protracted the actual impact would be on business. It’s equally difficult to predict how quickly the job market will revive. The experts are divided on the shape of the recovery curve as well—V shaped, U shaped and some are even predicting L shaped. Again, it’s anybody’s guess.

That said, massive stimulus announced by the western countries might keep markets lubricated but earnings recovery looks elusive at this juncture.

Despite the rally we have been experiencing from the lows of March; the primary trend of the market still appears bearish. When intense bears are at play, they often supersede the leaders of the preceding bull market and leadership changes. Therefore, you should be careful with your bets and leverages.

To understand the primary trend and its reversal you might read these articles

Gaps: technical analysis indicator to power your trade

Identify overbought and oversold stocks with RSI

MACD Generates entry and exit signals for stock traders

Avoid biases

Do you remember, when markets started falling in 2008; many investors who were waiting in the wings to invest fresh capital, latched on to infrastructure stocks ignoring valuations. That’s mainly because of recency bias—wherein investors focus only on the performance of a stock/index just before the fall.

Investors got trapped in pharmaceutical stocks in the bear market of 2015 due to recency bias.

Fast forward to 2020…will it be the banking and finance sector this time?

Keep track of the changing undercurrent

Over the last three years, Nifty Bank has outperformed Nifty 50 quite comfortably but in the present bearish phase, Nifty 50 has done relatively well (as compared to Nifty Bank).

Similarly, the weightage of financial stocks in the Nifty 50 has dipped in March to 37% from 42% in February—just before the coronavirus knocked down markets. Non-financial stocks have been driving the pull back rallies. Over the last three years, consumer goods have gained prominence in the index consistently, IT has performed steadily and Autos have lost sheen.

Is this just an exception and will financials continue to dominate Indian markets or is it an early indication of change in the market leadership? You see, 90% of Nifty Bank is comprised of just 5 stocks. Needless to say, private sector banks were market darlings before markets crashed and were quoting at expensive valuations. Will bears force investors to value them more judiciously?

Frankly, it’s nothing more than speculation at this juncture. However, you should keenly monitor the stock price movement as well as the financial performance of banks and NBFCs.

Monitor how companies handle this pandemic situation

It still remains to be seen how fast the global as well as Indian economy recovers from the shocks of Coronavirus pandemic. A few experts are anticipating another round of NPA (Non-performing Asset) cycle in the aftermath of Coronavirus outbreak. If it happens, indeed, financial stocks might come under the weather.

Companies and sectors that can handle the disruptions caused by coronavirus and carve out their growth path might become popular with investors in times to come. Stock market performance of companies might suggest to you how well-placed they are to sail through slowdown and capitalize on future opportunities.

In summary

If you think the bear market will end as soon as we have dealt with coronavirus, you are perhaps undermining the economic slowdown that may follow.

Of course, markets are always forward-looking hence they might bottom out much before the real economy bottoms out but whether that will be a “V” shaped or “U” shaped recovery is difficult to forecast at this juncture. Hence, leave it to markets. Market trend is your friend, if you interpret it correctly.

Unless the primary trend changes from bearish to bullish, buy-the-dip-sell-the-rally might remain the favourite strategy on Dalal Street. Please remember, bulls hint at how amplified the optimism is while bears tell you how well-founded it is. Bear markets are not bad; they introduce you to the real investor in you!

Editor’s note: Corona Pandemic has been an unprecedented event even for many ace fund managers who have more than two-decades of experience. If your portfolio isn’t doing well, don’t get disappointed. Disciplined approach, well thought-through strategies and prudent asset allocation hold the key!

This too shall pass.

Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.