The much awaited “Correction”?

Some weeks are good, some aren’t. But for the markets since November, every week was a good week if not a great week. Rare have been the times when we saw such exuberance in markets with everything flying off. 

Making money never felt so easy. All you had to do is be long in a stock, in any stock for that matter. Of course, this exuberance wasn’t limited to Indian Markets alone. US markets which we track closely seemed to be doing the same as the countdown to the end of President Trump started.

With Biden taking Oath, on twitter it would seem as if the United States has been freed from a dictator. Happy days are here again it seems or maybe not for there are very few men (or women) who have had no faults. 

Markets dislike consensus. If everyone loves a stock too much, the probability is high that the stock will either do nothing for a while or worse retrace a part or the whole of the journey it had in recent times. 

Too much good news is bad news. Between Biden taking the floor, the CoronaVirus vaccine being out and the Federal Reserve promise of unlimited bounties in the near future, there doesn’t seem to be much for things to go wrong. Complacency sets in and just when you think that the Sun will finally set in the east will the market surprise one like none other.

Fund Managers are bullish. I am bullish. In fact, other than a few friends many of whom I know are always skeptical, I cannot find many souls who aren’t bullish in this market. Then again, why would you want to be bearish when you can be bullish and reap in the rewards.

From its low of March, Sensex has doubled. But if you were to move your starting point back to the start of 2020, the gain would have been just around 20%. Nothing out of the ordinary. 

In the past, one was used to seeing a decent pullback when the market deviated too much from its mean in too short a period of time. The crisis of 2008 changed all that and we are now used to seeing shallower and shallower corrections. The correction of March 2020 was in fact the worst correction we have seen since 2008. 

Corrections are good and welcome. A friend of mine asked why I was hoping for a correction when I would not short the market. A correction will be painful for my Bank Account since I have no intention to exit the market at the first signs of a retracement but at the same time, markets that keep moving higher without a correction are like a forest which keeps accumulating dry wood. A single spark is enough to cause worse damage than limited fires over time would have. 

When it becomes too easy to make money, investors lose proportion of what is risky and what’s not. In the bond markets for instance today Greece and Spain which have never really recovered from the crisis of 2008 are able to borrow cheaply than even countries like India despite our cleaner record of repayment and a more stable currency and economy. 

My belief that I have been forming in the last few months is that we are at the start of a multi-leg bull market. But a bull market doesn’t mean a one way move without any corrections. During the 2003 to 2008 bull market which was one of India’s finest and best bull markets of all time, we faced 2 corrections of greater than 30% and 2 corrections of 15%. 

A correction in the Sensex to say around 40,000 may seem extreme today but 40,000 was what we broke above as recently as November. Like in games, markets need a time-out once in a while to enable everyone to catch their breath. As investors, we should welcome such moves. 

As I write this, India VIX is around 22.88 which means that traders aren’t really expecting a huge crash. But things can change on the dime. 

“Luck Is What Happens When Preparation Meets Opportunity” – Seneca

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1 Response

  1. Kersi Khsmbata says:

    Happy to share the insight or suffering of 2008. Also Share Harshad Mehta Crash where mkt went from 1000 to 4000 in 1992.
    God Bless You.
    Keep on enlighting.

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