The Professional Ticker Reader

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Jan 27, 2005

Is the bull market terminated ??
Weight of evidence says not yet !

The recent fortnight has been harrowing for the market players as the indices have shed nearly 10 % from their peaks from Jan 06, 2005 onwards. What has been unnerving is the sudden reversal in the market trends - FII investments turning negative, bear hammering accelerating and retail players deserting the markets overnight. The events of Jan 2004 are still fresh in our minds and one is fearful of history repeating itself like last year, when we had to wait almost a full year before our entry levels were seen again. There are doubts in our minds as whether the bullishness is through and a dull and listless period lies ahead. We go through the nuts and bolts below -

Mind over matter argument

Majority of the people who I have talked to, are of the opinion that the "volatility has jumped". Markets have become unnervingly volatile and investing has become a harrowing experience. To my mind, it's all in your mind. Go back in time and recollect if you would have taken it amiss if the indices had fluctuated 60 & 20 points on the Sensex and Nifty respectively ? Probably not ! Take a look at the indices now - they are approximately 50 % higher than the May 17, 2004 levels. If 1.5 % intraday fluctuation of 60 & 20 points on the Sensex & Nifty respectively did not unnerve you, similar intraday fluctuations simply translate to 90 & 30 points on the Sensex & Nifty respectively. It's just that the markets have risen and in that way "become bigger". We are yet to come to grips with these levels on the indices and therefore feel that the volatility is high. In reality, the implied volatility compares very well with the May 17, 2004 levels.

Technicals

The BSE Sensex weekly chart plotting the fall ( retracement ) of the bull run that commenced from May 2003 and terminating in January 2004 suggests that the index effectively bottomed out at 50 % retracement levels. The intraday lows of May 17 are treated as an exceptional aberration. The 4613 levels in the weekended June 25, 2004 saw a turning point in the markets. This marked a phase of the markets getting out of weaker hands and getting into stronger hands. Therefore, the ensuing upmove that commenced was stronger in nature and likely to overcome the previous top of 6256 in Jan 2004. A post portem of the January 2005 levels proves that this was indeed so. The important point to note here is that a classic bull market retracement of 50 % was not exceeded.

Now for the picture going forward

The same period ( week ended June 26, 2004 ) marks the beginning of the next leg of the upmove and the rally terminating in the first week of Jan 2005. Of the entire upmove from 4616 to 6696, not even 38.20 % has been retraced so far. That retracement comes at the 5902 levels. We believe that since this leg of the upmove has been due to the markets being in stronger hands, a 50 % retracement of the entire upmove may not / need not occur. There exist a strong band of supports on account of retracement support systems at 5902 and the 5780 levels on the Sensex. We do not foresee the markets closing below this level of 5780 in a pessimistic scenario in the immediate future. Intraday lows maybe seen however.

We are of the opinion that the bull market remains intact and unless conclusive weight of evidence suggests otherwise, we would prefer to maintain a bullish approach for now.

Your call of action

Ships are safest in the harbour. But that's not what they are built for !!!

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Have a profitable day.

Vijay L Bhambwani
Ceo :- Bsplindia.com

The author is a Mumbai based investment consultant and invites feedback at Vijay@BSPLindia.com and ( 022 ) 23438482 / 23400345.

SEBI disclosure - The author has no positions in the stocks mentioned above.

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