Is this the end of bear market? Let’s do some data crunching

Greed and fear are the two most powerful emotions which drive the market. The market offers the best opportunities when it swings to either of these two extreme emotions.

Nifty 50 is down by about 18% from its October 2021 high of 18,604. The mid-cap and small-cap indices have fallen more than 20% and entered the bear market.

Now the question on everyone’s mind is that is this the end of the bear market or will we fall further? To answer this question let us understand how you can measure these two emotions of greed and fear with the help of numbers.

The fall of Covid-19 is a classic example of fear gripping the market. When a stock trades above its 200-day moving average (DMA) it is considered to be in a long-term uptrend. When most stocks are trading above their 200 DMA it is considered a bull market.

During the Covid lows, only 10% of Nifty 50 stocks were trading above their 200 DMA. This was the lowest level recorded since 2015. There was an extreme level of fear in the markets. And guess what… that’s where the markets bottomed.

% of Nifty 50 Stocks trading above 200 DMA (Source: Chartink)

The situation today is like what we observed during the pandemic. On June 20, 2022, only 14% of the Nifty 50 stocks closed above their 200 DMA which has been the lowest in the last eight years excluding the Covid-fall.
Apart from this, the PE of the Nifty 50 is now trading at 19.07 which is below its median level of 20.48. During the Covid lows, Nifty’s PE had hit a low of 17.15. Nifty’s current PE is up only 11% above its Covid lows. If you consider the current WPI inflation of 15% then Nifty is already trading below Covid valuations.

Behavioral aspect is also indicating an extreme apart from fundamentals and technicals. The sentiment in the market is so pessimistic that google searches for the word “bear market” has recorded the second-highest readings after the Covid outbreak.

Trend of Word “Bear Market” on Google Trends(Source: Google Trends)

All of this suggests excessive fear and pessimism in the markets. Now, what should you do when there is too much fear? Warren Buffett would say to be greedy when everyone else is fearful.

Just 2 months after the Covid fall, the index witnessed a staggering return of about 32%. A year later the Nifty 50 index had almost doubled. It was one of the fastest rallies in a year in Indian markets.

From where we stand today, one would be skeptical while investing. But the risk-to-reward ratio is very attractive. The downside risk seems limited from here. We might be closer than we think for yet another GREED ride.

Market participants can consider this as a buying opportunity to accumulate sound stocks with robust fundamentals, free cash flows, and less leverage for a longer horizon while ignoring the short-term hiccups.

Technical Outlook

Nifty 50 index closed positive after trading in a choppy manner for the entire week. It has formed a bullish harami candlestick pattern on the weekly charts. Market sentiments are mostly on the negative side as every bounce is getting sold into. However, the Nifty is getting rejected at lower levels which also coincides with the falling channel support.

Many major global indices are witnessing a bounce from falling support on similar lines. This hints at a possibility of a brief bounce-back rally. We suggest traders maintain a neutral to a mild positive bias as long as the Nifty does not break below the immediate support of 15200. Immediate resistance is now placed at 15900.

Expectations for the week
Markets could be influenced by an eventful economic calendar in the coming week. To start with, all eyes would be on US quarterly GDP growth rate numbers. If US registers negative growth then it will officially enter a recession which can dampen the market sentiment.

Back home, the auto sales numbers will continue to drive stock-specific movements on D-street as investors try to decode the future trend.

Further, whipsaw movements in the indices may be witnessed due to the monthly F&O expiry in the second half of the week. In the midst of volatility, investing in fundamentally resilient stocks in a phased manner would be a good approach. Nifty 50 closed the week at 15,699.25, up by 2.65%.

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