Sensex, 18K by 2010 - says who?

Milind Karandikar, a wave theory specialist, predicts Sensex levels of - hold your breath - 18000 to 40000.

Even since the market crossed 8000, we have received several calls from readers asking for Milind Karandikar's mobile numbers. Who is he? He is no famous fund manager. Not a hot shot equity analyst. Nor is he a soothsayer who can read the stars.

Regular readers of The Smart Investor would know that he was one of the very, very few to predict one of the most seminal moments in recent history of Indian stock markets. He predicted the May 17 fall and then followed it up with a prediction of Sensex crossing 8000, for good measure.

A chemical engineer from IIT Bombay, Karandikar started out with Garware Polyester and spent a couple of years at Hoechst. The enterpreneurial spirit however forced him to start out a coaching center for Class XII students. For the past 18 years he has been coaching students on solving the mysteries of mathematics in the Mumbai suburb of Vile Parle.

How did he get interested in stocks? Way back in 1997, Karandikar happened to spot someone analysing charts on an NSE terminal. Fascinated by the idea - remember, graphs, charts and numbers are anyway his bread and butter - Karandikar started reading up books on technical analysis.

In his pursuit of technical analysis, Karandikar has made several friends in the community of chartists. But one that has been particularly meaningful has been his acquaintance with Vivek Patil who is a successful chartist himself and has developed the technical analysis software ASA.

Patil introduced Karandikar to the Neowave Theory which is by general perception the toughest technical theory to fathom. Patil, whose database we use, also introduced us to Karandikar.

Glen Neely's Neowave Theory or Neely's extention of Wave Theory build in additional rules and conditions to the classic Elliot Wave Theory in order to identify the patterns and make predictions.

Neely, 40-something old, lives in California and tracks the S&P 500, Gold and US Treasury notes, according to Karandikar who has kept in touch with Neely through e-mail to understand his theory and market situations better.

According to Karandikar, the trick is really to follow the rules accurately and identify the patterns correctly. But most analysts do not follow the theory since it is complex and requires a lot of patience. For longer time periods, the predictability of Neowave Theory is infinitely superior to other technical analysis tools, says Karandikar.

As a portfolio strategy, Karandikar like many other chartists relies on his own analysis to time the market, i.e., to decide when exactly to buy and sell. But he relies on fundamental analysis to decide which companies to invest in.

He looks at the big picture - BSE 500 - to analyse the overall trend, then studies the sectoral charts and then picks up a few fundamentally sound companies in bullish sectors.

His personal equity portfolio is now worth about Rs 70 lakh. "That is what the portfolio has appreciated to now. I didn't begin with that amount," says Karandikar with a tinge of embarrassment.

The downside with Wave Theory, as is with other charting tools, is that the analyst may not correctly identify the pattern and hence the results may throw unpleasant surprises. But then Karandikar's past track record suggest that he has got some things right so far. (His previous articles are available at Business Standard website www.business-standard.com .) So there is probably more reason to believe him than to defy.

Karnidkar predicts the Sensex to be somewhere between 18,000 "� 40,000 in the next five years. Just to give some fundamental perspective, the Sensex would have to grow earnings at a compounded annual growth rate of 17 per cent to get to 18000 five years hence; and at 36 per cent to get to 40,000.

This is assuming current P/E multiples hold. Similarly, if we assume earnings grows at a annual rate of 15 per cent, the P/E would have to be 18 times for the Sensex to be at 18000; and 40-odd for it to be at 40000.

Read on for Karandikar's view on the Sensex journey going forward. Besides, we have also got a second opinion from own in-house expert Devangshu Datta.

Bulls hit the bull's eye,
Bears can't bear it

Technical analysis by Milind Karandikar

A couple of days after my last article "Join the party or pay the price" was published on 11th April 2005 in the Smart Investor, Infosys Technology announced its results. The market crashed by 219 points making the bulls run for cover.

My article had portrayed an extremely bullish picture about the stock market. Naturally I received numerous mails doubting my analysis and hoping me to change my predictions on the backdrop of the fall. Many of them were fundamentally convinced about the weakness induced in the market due to several reasons and could see no signs of recovery in the near future. Many must have thought if I was asking them to join the party of bears and not the bulls.

Most of the analysts proclaimed the commencement of a bear market leading to liquidation of long positions by many investors. The following huge rally proved all of them wrong.

As I had mentioned in my last article that the market is too powerful to behave the way we wish. I never try to follow fundamental events to alter my counts. Blaming fundamental reasons for the flaws in technical analysis is the fundamental mistake in technical analysis.

The game of investments is quite complex. The success in this game lies in one's ability to remain neutral and observe the crowd behaviour. Neowave theory deals only with the study of these behavioural price patterns.

However the job of remaining neutral is extremely difficult. Emotions that drive the crowds in stock market affect everyone, including me. These influences force the market participants to commit mistakes on several occasions.

Today I am making an attempt to visualize the probable price movements on long-term charts (monthly charts). Accordingly to my distant Guru, Glenn Neely, the long-term charts would always dictate the short-term charts. If my analysis of long-term charts (presented later) is right then Indian economy is shifting from a bullish to a super bullish scenario for the next few years.

Technical Outlook
Usually I analyse and follow the broader market indices BSE500 or NSE500. However only BSE Sensex data is available from the year 1979. Since I am presenting a longer-term analysis today, I am using BSE Sensex monthly chart for the purpose.

Since the consolidation phase from 1992-2003 has been well surpassed by the current rally (from May 2003), the rally is definitely not a part of the consolidation pattern. The rise from 1980-1992 therefore can be considered to be one single impulse wave followed by a corrective diametric formation.

A diametric formation is a new Neowave pattern consisting of seven segments a, b, c, d, e, f, g. These segments arrange in such a way that after drawing trend lines the shape appears like a bow tie or a diamond. The pattern presented here is a bow tie shape.

As per Neowave rules the correction following an impulse wave takes more time, usually 1.618 to 2.618 times the time of the impulse wave. Hence the correction of the impulse from 1980-1992 was not over in May 2003.

The current up move would form a large X-wave that connects two such corrective patterns; one that is already over (1992-2003) and the other that will commence after the X-wave ends. This X-wave also seems to be developing as a diametric whose wave 'E' is currently on. This wave will be followed by wave 'F' downward and the last wave 'G' upwards.

Usually such a large X-wave would take two-thirds of the time of the first pattern. That means that this rally would probably continue till mid 2010. The normal termination of such a wave in terms of price is 0.382-0.618 length added to the top of the previous impulse (i.e. 1992 top) on the logarithmic scale.

These calculations project the X-wave to finish in the range of 18,000 to 40,000 (you'd better have a glass of water) in the next 5 years. Thereafter another consolidation phase of 6-7 years can be expected.

In my last article I had mentioned about a fall after 8000 is reached on the Sensex. But as time passes more and more waves unfold. Now since the longer-term picture is taking shape, such a steep fall is not expected even though there would be intermediate corrective moves.

Investment Perspective
The projections mentioned in the last paragraph seem to be mind-boggling. But such rapid escalations have occurred in the past with index multiplying more than 35 times in 12 years (1980-92) or more than 11 times in 4 years (1988-92).

A similar powerful psychological trend seems to have set in from May 2003, which no one can stop. Many are always worried whether the fundamentals would continue to support such a trend. I would rather say such a trend (which is always set in the minds of people first and then the economy) would drive the fundamentals to better ones.

If my long term perspective holds good, the investment opportunities would continue to exist in several sectors like auto ancillaries, cement, cotton textiles, banking etc. for some more years. In such a case many companies, which have shown, a turn around in last few years may cross their lifetime highs.

Investors should look for such scripts rather than penny stocks. Such manipulated penny stocks get battered so recklessly in a correction that one may lose all the accumulated profits in one trade. A continuous churning of portfolio within different sectors is a better strategy to stay long. One should invest with a long-term view and should not be deterred by intermediate corrections.

(Milind can be contacted at milindkarandikar@hotmail.com)

Second opinion

Elliot and Neo-wave theorists specialise in long-term predictions. Mostly their projection ratios are based on variations on the Fibonacci number series. The complications arise when chartists take different starting points in their interpretation.

According to Milind Karandikar's analysis, the Sensex is bound for a top somewhere between 18,000- 40,000 sometime within the next five years. Non-wave theorists would make a shorter-term projections of around 9000-9,500 by 2006 - that doesn't contradict Milind's predictions.

Ignore the top end of Milind's scale for the moment - the bottom end is mind-boggling enough. Or, is it? All that the minimum projection says is that the market would gain roughly 110 per cent in the next five years or, rise a CARG of 16.2 per cent. That is easy to envisage. Indian markets have frequently sustained higher returns than 16 per cent over longer periods, as Milind points out.

Fundamentally, the lower end fits in with consensus macro-economic predictions: Assume a GDP growth rate of 7-8 per cent till 2010, further assume an inflation rate of 5 per cent - summing to a nominal growth rate of 13 per cent through 2005-2010. If we have an equity premium of 5 per cent over nominal return, you're already exceeding the 18,000 Sensex zone. In fact, the Sensex would be trading at a very reasonable PE of between 12-15 at an 18,000 value circa 2010.

If you take the top end of the prediction, that's a different kettle of fish. A rise from 8,500 levels to 40,000 in five years implies a CARG of 36 per cent. That's difficult to envisage in the historical context of Indian markets. The Sensex has several times produced returns exceeding 36 per cent CARG over two-years. But not over 6-7 years.

It could happen. It has happened in bigger, deeper markets like Japan in the 1980s and the US in the 1990s. If the Indian economy does register sustained double-digit GDP growth, inflation moves somewhat higher and we stretch equity premiums for corporate growth it's possible.

A mark of 40 K in 2010 would imply a bubble unless something extraordinary happened to the Indian corporate environment. In that case, the subsequent correction, which Milind mentions in passing, would also reach epic proportions - just like the US corrections of 2001-02 or the decade-long drop in the Nikkei.