The web is full of praise for the US Federal Reserve. And, some news even mentions this to be Fed's boldest action since the Great Depression, invoking rarely used powers in an effort to contain a panic threatening to undermine the economy.
This would be the ideal enthusiasm Fed might want to spread unlike the fear that has gripped the market over the last few months. But, the very comparison to great depression seems more scary than optimistic. The sentiment though is clear, March was panic and panics don't just destroy wealth, but also create price bottoms.
And, even if it is a bear, the world does not come to an end and markets don't shut down, there could be longer stagnation (vacations) though, but that is fine.
Bear markets have different form, but they can be exciting wealth creation times. Accepting and living through them though needs more skill and understanding.
The real wealth of the last decade has been made by traders who grilled day after day with the secular cycle (multi years) bear from 1992-2002 in India.
There are some misconceptions about the bear. One, that it is all encompassing and second that it has four legs. Incorrect. A bear is not all encompassing, markets and different sectors lag and lead. So, while one sector may have started a bear market, the other sector may still be continuing the previous bull trend. For example, CNX IT started its bear trend early 2007, while banking has possibly started the bear trend in February 2008, after a year.
The banking sector fell over the edge and fell 42 per cent from the historical top. This, compared to 30 per cent fall in BSE Sensex makes the banking sector an underperformer. Whether it will still deliver seems wishful thinking.
In the current scenario, the Indian banking story of the decade might be over. The credit cycle exhaustion is a cyclical reality, which should see a restructuring in the banking sector.
The sector index has already delivered the first earnings signal for the first quarter 2008. The events should start unfolding now. It is expected that all bounces from recent lows at 7,316 in BSE Bankex would fail to make new highs.
The banking sector is an early starter in an economic cycle. The Sensex started moving up in 2001, four years after the uptrend in banking majors. So, if Sensex has to form a primary top this year, banking should lead. A consecutive break on BSE Bankex (10,000), ICICI Bank (1,000) and HDFC Bank (1,400) in March has bearish signatures all over.
Anticipated and happened cases are only possible using fractal science. Not that fractals don't get it wrong, but here are some predictions that came right. The CNX IT moved down; the early bear was seen coming starting January 2007.
The CNX IT's fall of 42 per cent since February 2007, also more than the Sensex, continues to validate the technology underperformance case. Then there is auto! The negativity continues and does not seem over yet.
But, despite all this negativity, a new high on Sensex is expected. Well, it does look strange. But then, owing to the relative shift between sectors and indices, the benchmark might still get its needed push to eke out another high.
Though marginal, we have seen an intermediate low in March. Now that the March low is in and respective sector supports have been hit, expect a market base now and some intermarket sectoral divergence.
The classic divergence that market witnessed this month was the lower low of the Sensex compared to a higher low in S&P CNX Nifty. The Nifty should crack the previous low at 4,448 to confirm the potential negativity on Sensex.
Above this, there is the BSE Oil, which unlike other sector indices, is still above the 50-week moving average. This brings us to the other misconception, that all the sectors which are in a bear market keep falling endlessly. Incorrect. The bear has three legs, a leg down, a rally and then, the final leg down.
So, it is just when the markets start crying bear, masses start looking for a saviour, panic and depression starts creeping in, the bear surprises with a rally. It is this rally, which should start sometime in the next few weeks. The coming week should give an indication of whether the anticipated supports hold.
From an Elliott perspective too, fractals across global markets look incomplete, whether you take Russia (IRTS), China (SSEC), Brazil (BVSP), Nikkei, Dow Jones Industrial Average or the Dow Transportation.
The global markets are expected to see multi months rise in a few weeks from now. Well, this prediction maybe wrong, but being wrong after markets fall 50 per cent (some emerging markets) is less risky than crying bull on the mountain top. Three legged bears may seem dawdling beast, but they are surprisingly nimble and profitable, if you have your exit strategies in place.
The author is CEO, Orpheus Capitals, a global alternative research firm
