Tuesday, June 1, 2010

Sensex / Nifty - Expect at least 20% correction by mid July 2010

This post is related to my previous post of to expect at least a 20% correction in India `s Sensex / Nifty by mid July 2010.
This post has detailed charts instead of just a table as in the previous post.
For convenience I will post the table here below as this post the basically a graphical elaboration of the table.
Given that Indian markets have risen 120% from their 9 March 2009 lows , the `billion tonnes of gold` question is if markets can continue to make newer highs or should we expect a big reversal in trend.
The objective of this post is to gather technical evidence of further upsides or down sides after having a sharp rally of + 120% in just 12 months.
Approach is to go back in history and see the charts and look for similar cases of Sensex / Nifty Index rally of over 70% or more in ~ 12 months.
Sample data - I have gone back to 1993 or 17 years to check for such sharp rallies. Point to note is that FII or Foreign Institutional Investment was allowed in India after the forex crisis in 1991. So this is another valid reason for seeing data only post 1991. ( Yes for a larger sample we should take at least 50-100 years old data but would require more resources for that ..maybe later)
Findings-  Now I have found only 4 such instances in the past 17 years where Sensex / Nifty rallied over + 70% in just 12 months or so. And in all those cases , in the next couple of months after hitting peak ,markets corrected by at least -25% in all cases. We have already seen similar manifestation in the Chinese Shanghai Composite :  97 % Rally from 1730 to 3400 in just 9 months - Oct 2008 to July 2009 and it is now at 2560 or 25% below the peak.
Here are the 4 instances with charts
1) July 1993 to Sep 1994  - Sensex 119% Bull market rally and - 26% bear market correction
 2) Oct 1998 to Feb 2000  - Sensex 113% Bull Market rally and - 31% bear market correction
3) Apr 2003 to Jan 2004  - Sensex 111% Bull Market rally and - 25% bear market correction

4) Mar 2007 to Jan 2008  - Sensex 68% Bull Market rally and - 29% bear market correction
5) Mar 2009 to till date - Sensex 120% bull market rally and ?? bear market correction ?
 Now here is the bottomline
If you refer the table at the beginning , you would see after after giving the first correction of over 10%, the second correction comes almost double of the period from the first correction. This time we had 11% correction on 25 May 2010 ( it took 35 trading days from the date Sensex made its top). That would mean the second correction would take place at 2x or 70 tradings days after. That would give outer limit of 25% correction by 13 July 2010 or target of Sensex 13,500 or Nifty 4,000.


Deepak Kumar Prasad said...

I will stick to this comment. And will follow.
Since I have already lost more than 40% of my investments and it time now to take rest.

I have been following oyu since a year . But looks like I will start buy/sell based on your views

The Fixer said...

Hi Deepak,
Nice to know you my posts have been of some value to you. Your kind words will keep on encouraging me to keep on posting.

Regarding the markets, yes, we have got great gains in 1 year, what we get normally in 3 years. So from on pure profit booking perspective also, it makes sense for money flows to reverse. How far will it go , no one can tell but the past data shows 25% correction is the minimum cut we get. Even if markets fall 25% to Sensex 13,500 / 4000 N , it will still be +65% above its March 2009 low of 8100.Lets hope it does not gets worse than that. But hope can be a dangerous thing sometimes.