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Tuesday, October 7, 2008

Interesting Analysis On BSE SENSEX

Please have a look at the table below with details of the sensex performance right from the year 1991. Last evening's closing has been taken for 2008 data temporarily. We have already knocked down 41% from 2007's close.


If we compute the CAGR for the sensex from 1991 to 2007 spanning 17 years we get a return of 14.91% explained as {(20286.99/1908.85)^(1/17)-1}. We have seen extraordinary/ astronomical returns in certain years namely 1999, 2003 and 2005-07 in in the band of 40-70%. This year having slipped into a bear market we need to adjust for the excesses on the downside and fall in line with the CAGR of 14.91% p.a. To maintain this CAGR going ahead into 2009 we need to make a bottom of 8069 or fall 60% from the highs.

Though the above is purely a quantitative analysis based on historical data, Elliot wave theory has already shown us an indicative target close to 9000 for the 4th corrective wave on the sensex and 8096 doesnt seem to be far off. We are at 11800 already and another 25% fall in the bellwether stocks like RIL and LnT will easily take us there. There seems to be excesses still left in capital goods stocks which have not yet witnessed the capitulation seen in metals and real estate counters. Once the poison gets out of the system we can form a nice base for the reemergence of the bull market or the fifth supercycle wave as the elliot wave theorists call it.

But for that to start we need a time wise correction. The value wise correction seems to be happening but time wise we need to travel a bit more. We are nine months into this correction and we have broken important support levels along the downside taking cues from global markets and concentrated FII selling across the cap curve.

Therefore reaching out to these bottoms of 8000-9000 may not happen so soon. We might have violent retracements, sharp rallies that give u a 20-25% pullback in a short span of time. But these pull backs will be short lived lasting for a week or two before we head back to lower lows once again. The confidence in the system, despite belief in long term story of India, has been severely dented at the moment. The patience of the retail investor is slowly fizzling out like a dim candlelight with each passing day, as he wipes his forehead with his already wet handkerchief seeing the sensex drop in hundreds and thousands, watching stock prices collapse under the force of gravity. Every recovery aimed by the indices is being met with selling as highly leveraged investors try to make an exit from their bleeding positions. Three to four pull back attempts from the lows of 3800 were attempted by the nifty, but each time we have seen the index making a lower top which indicates structural weakness and provides evidence of the deeper lows staring at the bottom, which is what has happened today with the index breaking down to a new low of 3581 and the sensex decisively collapsing to levels below Rakesh Jhunjhunwala's psychological "12000". He would, going by his own words, still be drinking like a fish, eating like a pig and smoking out his costly cigars without major worries as he has invested in the market right from levels of 3000 on the sensex. So even at the worst bottom of 8-9K he would still be making 3 times his cost.
Therefore friends, we are headed towards making decisive lows that might happen over a period of time but until then trades will keep happening in a range bound manner. Dont get fooled by smart V shaped recoveries and bet all your money . Typical bear markets end in a saucer bottom formation which means timely consolidation around the support levels before a strong rally emerges.Regular investors should be wise enough to catch the bottom of this range to buy and exit at the top of this range for short term gains. It requires regular tracking of the markets and considerable effort/knowledge. For those who believe in the India story, this is the time to invest and cherrypick with a 3-5 year view, as in the short term you might still see your portfolio heading down 10-15% even from these attractive levels. A new bull market will start only when there is extreme pessismism around, low volumes,analysts on TV predicting total gloom and doom issuing ridiculous targets for the sensex on the downside etc etc From now on, watch out for ur your neighbours, relatives and people u meet in your day to day life, the ones who were gung ho about new highs for the sensex at 21K.Even my autorickshaw guy was giving me a target of 5000 for reliance 10 months ago. People felt that the bull market was permanent and eternal, an easy gambling paradise to double one's networth in days n weeks, without realising that investing is a tough business. Now is the time to start engaging them in a conversation about the markets. If they disappear from your sight, then thats the time to start investing heavily. Guess we are heading closer to those exciting moments, the so called "once in a lifetime" investing opportunity which intelligent investors capitalise upon to make a lifetime bargain.

The only risk to my estimate of 8-9K on the sensex is the "patience risk" as i would term it whereby long term investors and the domestic institutions in India say "Hey look, we are not selling the India story so easily for an economy growing at 7-8%. We are holding on come what may". This resilience will throw all market theories out of the window and a few months down the line we may be left ruing the fact that we kept our purse strings zipped and tight at these levels.

Markets are indeed supreme!!

Source: Interesting analysis on sensex; Author: Dharma
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3 comments:

  1. Very nicely composed article..great write up...

    ReplyDelete
  2. Great article...composed nicely...excellent write up..

    ReplyDelete
  3. The elliot wave has crested again from the troughs, we are now back at 16900 - A rise of 101% from the low of 2008/09.

    -Chandu

    ReplyDelete

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