5 Early Signs that Indicate ‘Markets may have Found the Bottom’.

6 min read
5 Early Signs that Indicate ‘Markets may have Found the Bottom’.

Coronavirus vaccine could be beady in six months and In China, life returning to normal as the coronavirus outbreak slows.

Be it Zika, Ebola or SARS and see how it affected the market in the past. yes! the market does come down when an epidemic spreads but thereafter it does deliver fantastic returns. In 2020 you can proudly say that the 2003 SARS case was a great opportunity to buy and most of the stock went up by 8–10 times till now. In 2030 you will again gladly say that look 2020 Coronavirus was a great opportunity to buy. The global recession due to Coronavirus is one of its kind as we have never seen the financial and health crisis happening together.

While attending a panel discussion with some of the well-known names in the market like Nilesh Shah (MD, Kotak AMC), Anil Singhvi (Managing Editor, Zee Business.), Navneet Munot (CIO,  SBI Mutual Fund) about the current market scenario and possible solutions. I noted down five important points.

  • FIIs pulled out almost 83,000 Cr between Jan and March from India and these funds are most probably come back to India as the world will shift from ‘Made in China’ to ‘Made in India’ due to the deteriorating image of china due to Coronavirus. Many companies have already started to abort operation in china.
  • Measures taken by RBI are extraordinary as it is a required combination and fiscal and social stimulus.
  • When Crude comes by $1 then India saves around $1 bn. we fulfill 82% oil requirements through imports. Crude came down from $65 to $30 so we are hugely benefitted from this oil price crash. These funds can possibly be used to fund the deficit.
  • If you want to buy the stocks in the current scenario then avoid companies based on ‘leveraging’ and invest in fundamentally strong stocks with lessor debt to equity.
  • By allowing the export of hydroxychloroquine, India has helped many nations like US, Brazil, etc and Trump personally thanks India by saying “It will not be forgotten”. This could strengthen the bond between India and other developed nations and so FDI.

The big question on everyone’s mind is this bounce that we’re seeing is it just a short-covering bear market rally that will ultimately fail or is this a “V” bottom. Let’s analyse it.

Top 5 reasons that show why stock markets have found the bottom.

  1. The mother market US shows the Golden Cross on the daily chart for the first time on Feb 24, 2020. Since hitting to a low of 18,592 it rebounded 31% from its bottom, based on Fibonacci retracement, this means it has moved back halfway to its highs. The S&P 500 rose by 12.1% this week — its best performance since 1974.

2. From the first time since 24 Feb 2020, all four major Indian indices show Bullish crossover. (See black circles)

3. FIIs poured approx Rs. 4,500 Cr in the last three sessions. SIPs see the highest inflows despite the market fall in March. Equity funds registered highest-ever inflows of Rs 11,723 crore in FY20.

4. India VIX tumbled 40% from its peak.

India VIX is a volatility index based on the NIFTY Index Option prices. This indicator is known as the “investor fear gauge,” because it reflects investors’ best predictions of near-term market volatility or risk. In general, VIX starts to rise during times of financial stress and lessens as investors become complacent. It is the market’s best prediction of near-term market volatility.

This index surged 700% to 84 levels in less than 3 months, which has never been witnessed by market participants in the last 3 decades. Now, it cooled from 40% to 49 levels from its recent peak of 83 levels. Cooling down Indian VIX is an indication that bulls are taking charge of the market. VIX hit a record high level of 92 in 2008.

Why does VIX go up when market goes down?
Answer: When the market goes down, investors would want to purchase insurance, which drives up the prices of put options and increases the VIX. The VIX decreases when there’s less demand for put options as the market rises. That’s why it tends to move inversely to equities.(Google)

5. Advance-decline ratio has hit a multi-year low (Oversold)

Meanwhile, the net of the Nifty500 advance-decline ratio has hit a multi-year low of -497 level, something that has been seen only thrice in the last two decades.

The advance-decline ratio is an indicator that shows market breadth. It is based on net advances, where the number of declining stocks is subtracted from the number of advancing stocks to reflect the health of the broader market.

In the last four major corrections in 2015, 2010, 2008 and 2006 — each measuring at least 30%t fall from respective lifetime highs amid global selloff — the net advance-decline ratio had approached the oversold condition of -496, -466, -494, -487, respectively. (ET)

In today’s scenario post-pandemic, India should:

  • Invite companies to start manufacturing in India. For example, SAMSUNG manufactures and sell phone, AC, fridge, TV, etc in India with a turnover of $10–12 bn but In Vietnan SAMSUNG’s turnover is almost $62 bn, they manufacture in Vietnam and sell it across the world and contributes 28% in Vietnam’s GDP.
  • Sell some dollar reserves and increase the reserves of Brent crude at a current cheaper rate.
  • Give some relief to the telecom sector so that they can come out of the current crisis and maintain the trio competition.

Note: Early signs don’t guarantee the bottom but it shows the possibilities based on research. In the fourth quarter of 2008, US market witnessed many different rallies, some of which almost 20% a couple of times — but the market did not bottom until March of 2009. , these were just bear market rallies.

In India, we witnessed the PE of 12.73 in 2008 and currently, we are trading at 19.38 PE (The lowest PE we witnessed was at 17.15 23-Mar-2020.) So there is still some room for the downside but it's not certain.

Simply put, If you are a pessimist then you will look at Italy, Iran or Spain but if you are an optimist then you will look for Wuhan, South Korea who almost emerged from its nightmare. On April 7, 2020, China reports no Covid-19 deaths for the first time.

Pfizer Inc. has also found a promising but early potential coronavirus treatment, which the drugmaker aims to begin testing in patients this summer. Today or tomorrow we will get the vaccine and this pandemic would merely be a bitter history. If you are looking at the market from a near term perspective then be prepared for tackling volatility as everything is still awful.

In the long term, we are sure that everything is going to be fine and investors will get extraordinary returns.

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Akshay Seth


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