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Commentary

Start of a New Bull Market?

A Bull market in the markets is one of the best times to be invested as stocks more or less follow the herd (going up) and regardless of when you enter, opportunities are available in one sector or the other.

But getting when a bull market started is easy only in hindsight and never when we are literally at the starting point since we tend to discount the bad news and focus on the charts / positives in the earlier era while focusing on the negatives this time around making us believe that a bull market couldn’t possibly start in this environment.

One of the benefits of being a trend follower is that we do not believe we can predict the market on where the future lies and hence the best we could do is try and be with the larger trend that is in force.

When the bull market started in 2003, there was a real gloom in markets with no one feeling confident of the future, let alone think that we were at the start of one of the greatest bull run we had ever seen. In 2009, people were so shaken by the rapid fall of 2008 that they couldn’t believe that markets could climb so fast so much.

The current scenario cannot be really called the start of a new bull market since the fall we saw in 2015 can be seen more of a reaction to the over expectations that got build up as Modi came to Power, but given the fact that technically we did get into a bear market (what ever definition you used), we now need to focus on whether those bear market signals are well and truly invalidated.

Bull / Bear markets have no clear definitions and so one needs to use multiple such definitions and arrive at a conclusion. So, lets take a look at some of the definitions and where the market is trading currently.

  1. The 20% Rule

One of the simplest rules, it basically says that we enter a bear market when markets drop more than 20% from the peak and enter into a bull phase when we rise 20% from the lows.

Nifty 50 entered the bear market when it dropped 20% from its peak in Jan 2016. While markets final low was another 6.65%, theoretically speaking this bear market was very much a truncated one despite signs of all around gloom and doom.

When Nifty crossed above 8190, it also meant a rise of 20% from its bottom hence invalidating the bear market and suggesting the start of a new bull market.

2. The 200 DMA / EMA Rule

Markets are in a Bear Phase when below the 200 days average is one of the better known ones. While the first break below the 200 DMA happened in March 2015, it was never a smooth ride with the many chops. Even recently, one saw plenty of chops till it broke out.

200 MA Cross on Nifty 50

200 MA Cross on Nifty 50

3. The 13 by 34 Weekly Rule

While moving average crossovers are well know, many a well known technical analysts use this to determine the trend of the market. Once again, this comes with a fair bit of risks (Whips).

 

13 by 34 EMA Cross on Weekly

13 by 34 EMA Cross on Weekly

4. The Ned Davis Rule

The Ned Davis rule of a a bull market requires two things to happen. A Bull Market requires a 30% rise in the Dow Jones Industrial Average after 50 calendar days or a 13% rise after 155 calendar day.

While Nifty 50 is up greater than 13% from its low, its still just 60+ days from the low. Another 10% rise too could trigger this rule though by that time, Nifty 50 will be closer to 9000 (8872 to be specific).

5. RSI on Weekly

 Now, this is not really a rule of Bull Markets, but when RSI on the weekly moves above 60, it showcases strong underlying momentum and one that can carry. Here is a Nifty chart with previous Buy / Sell signals (Arrows)

RSI(14) on Weekly

RSI(14) on Weekly

And finally, my own Trend Indicator went into Strongly bullish mode a week ago.

Only in hindsight can we really know whether this would be a great time to enter or not, but at the moment, my money is on being bullish rather than try to predict whether this will whip and the down-turn will continue. Remember the saying

“the early bird catches the worm but the second mouse gets the cheese”

No Risk = No Gains

Discussion

7 Responses to “Start of a New Bull Market?”

  1. Every bull market has some leading sectors emerging. Which sectors could lead the bull market this time?

    Posted by Raju Dudam | 5th June 2016, 3:18 am
  2. We simply do not know what the future holds . . . however, we shall spend most of our time &energy trying to figure out just that.

    Posted by Nilesh Kamerkar | 5th June 2016, 8:39 am
  3. For long term investors its better to stay invested in markets, irrespective of the trend – bears or bulls.

    Posted by Mac | 6th June 2016, 11:33 pm
    • The only way that long term works is if you Buy Right and Sit Tight. But what is right? Even big companies have given Zero return over years (HLL – 10 years, RIL, Zero Returns (actually down 40% from its peak as we speak)).

      Nifty Bees in 2008 made a high of 760 and then tumbled to a low of 230. Opportunities if not used will provide one with a return (assuming one invests in Nifty ETF) of around 10 – 12% (which is what Nifty has given since Inception). But the above returns were during high interest / high inflation period. Will we get similar returns in a low interest / inflation scenario as well?

      To me, the idea of analysis is to be able to bet big when the odds are in my favor and bet small (or be on sidelines) when they aren’t.

      The only asset class where Buy & Hold (regardless of Bull or Bear) works is Real Estate (not when you are using it as a investment avenue) since you would have bought it for personal use and not looking at its possible gains / losses of the future.

      Posted by Prashanth_admin | 7th June 2016, 10:33 am
  4. You say that your own Trend Indicator went into Strongly bullish mode a week ago.. in which case I would think the asset allocation should be more in favor of equity than before. If my understanding is correct, then why the equity portion of your asset allocation recommendation for June 2016 (http://www.portfolioyoga.com/wp/asset-allocator/) has gone down? Would appreciate if you could clarify.

    The posts are really eye opening.. please keep them coming.

    Posted by Balaji Prabhakaran | 8th June 2016, 2:54 pm

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