Free-Fall How to hang on when markets don’t

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Too much sweetness elicits an aversion for sweets. Considering the way the are markets turning out to be, this dictum seems to have a reigning aptness. After endless claims that of the peak that the markets is yet to achieve, and the harangue of experts on the powerful bull-run, of late one observes a gripping pessimism and cautiousness.

In fact, after the unravelling of the subprime mortgage issue, which is yet to get demystified completely, signs of the US recession, the Fed cuts, dismal January IIP growth, and lower growth estimates ahead, have reinforced a perceived belief — Are we in a bear phase? Here is an analysis to gauge the signs of a bear market and the steps you should take to stay afloat or at least affected by these markets.

Signs of recovery

If one looks at the statistics of the BSE indices as of January 7, 2008, the Sensex was down by 28%, mid-caps crashed by 41% and small-caps plummeted by 48%. A comparison of these numbers with the previous crash in May 2006 demonstrates that the May 2006 decline was less steeper in terms of percentage, except for the Sensex. The Sensex, midcaps and smallcaps declined by 29%, 38% and 41% respectively from their all-time highs.

The volumes in the recent crash also showed sluggishness and lesser involvement of the high networth investors (HNIs) and institutional players, due to uncertainty about the near-term trend. Also, considering the lower estimates ahead and overstretched valuation, there was a need for a healthy correction. And subsequently, a lower price-earning multiple as compared to 22(x) when the index was at an all-time high was expected.

No doubt the Sensex is at a six-month low, the charts don’t show any signs of recovery. Volumes are dismal and most of the time, the markets open with a gap-up or gap-down. This suggests volatility and uncertainity in the near-term. This may signal a bear phase, but the fundamentals of the economy are intact due to higher consumption and investment.