Nifty Analysis: Outlook and Trend for 24th Mar 2020

Medium Term Trend: ↓Down (Changes to up above 10100)

Panic On Dalal Street: Nifty once again opened with a huge gap down around 8000 and triggered a circuit breaker around 7800 levels weakness continued after markets resumed trading and Nifty dropped to 7600 levels. It closed at 7610 down by a whopping 13%.

Its difficult to believe your eyes when you see Nifty trading around 7500 levels. Who would have imagined that markets will see such a sharp fall in matter of days (corona or no corona). This fall has been vicious and spiteful and has knocked the air out of markets lungs. Period.

Last few updates we had mentioned that around 8500 market has attained equality with all the major falls it has seen and its likely that we make a bottom around these levels and try to move up. Weekly close was also above 8500, however todays fall has raised doubts that markets are not yet done with the fall and has more legs to go ( may be timewise if not pricewise). Markets are spending too much time below 8500-9000 and its not a good sign. If we continue to spend time below 9k then we are ruling out a smart recovery immediately. Its not one of those correction which happens just to square off traders position (bear trap) and moves up after doing so. This is wealth destruction and if we continue to trade below 9k the chances of this correction extending for next few months will increase dramatically ( its already increased aa lot after todays fall). 

When one analyse markets for a long term perspective ( in this case for almost 20-30 years) it has to be done on  monthly charts. Now when we look at current month chart, the position does not look good but March has still few more trading sessions to go. If it can make a smart comeback above 8500-9000 levels then some bit of hope of a fast recovery will be rekindled however if we end current month around same levels or around 8k then we are going for a long-long correction (time wise).

When we say long correction it means atleast most of 2020 and probably some bit (1st qtr)  of 2021 as well. Markets are likely to spend next 10-12  months in sideways to weak trend ( like it did between 2001-2003 where Sensex kept trading between 3000-4000). Its Possible that markets are damaged too much to make a smart recovery from here ( another few trading sessions should confirm that).

So even though we were expecting markets to make a bottom around 8500 zone and move up, but after seeing todays move its possible that markets are preparing itself for a long haul in bear territory. Leaders/sectors we had seen outperforming in last few years will start underperforming and new leaders and sectors will emerge. This will make large investors reshuffle or rejig their portfolio. This entire process is its a time consuming process and will happen slowly and take its own sweet time. To avoid such a scenario markets must make a quick recovery and make it fast.

Looking at market PE , currently its sitting at 18. Mean/average PE of market is around 20.Just in Jan we were trading around a PE of 30 and just in a matter of days we have come down to 18. Lowest PE Nifty has seen is ~12 in 2008 & 2003 (mind you PE can continue to come down even when markets moves up like it happened in 2003). For long term perspective a PE ration of anything between 12-20 is very good for investment so one should continue to invest in good stocks, just be mindful of the stocks which did exceedingly well in previous bull run (like banks) as those may underperform now.Alsoa PE ratio below 15-16 has never sustained in India for long so keep that in mind too.

So just to summarise, continuous weakness below 8500 has raised a possibility that markets are preparing themselves for a long haul in bear trajectory( 10-12 months). In case we dont see a smart recovery above 9k soon then the chances are we will spend a lot more time around these levels. For long term investors it is a good news as they will get a once in a lifetime opportunity to invest but not so good news for people who have a large portfolio as it would mean they have to endure a lot more pain for a lot more time and possibly reshuffle their portfolio as well. From trading perspective , better to stay away till VIX cool downs to respectable levels ( less than 30).

Happy Trading!