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When the market goes down, we wonder as to when would it go up, and when it does go up, we worry if we are going to face a market crash. Let's find out the logical way to find out where might be the 'peak' of bull market and 'bottom' of bear market.
Market is touching new highs everyday, investors are asking, Is this the top? Is there any market crash ahead? will it continue to same for some time? If Yes then till what time?
Some investors are sitting on cash, finding the right time to get in, some of them still waiting to get over from march horror, rest of them trying their luck via swing trade. wow!
Amfi data shows monthly outflows from equity funds for the fifth straight month in November, as redemptions intensified on profit booking in spite of the benchmark indices scaling lifetime highs. FPIs, on the other hand, have turned aggressive towards emerging economies like India because of a weakening dollar and other emerging currencies. This is leading to foreign investors shifting their focus to non-US assets and investing in stocks, bonds and currencies of emerging economies on hopes that a vaccine will drive higher growth is such countries.
Let's find out the logical way to find out where might be the 'peak' of bull market and 'bottom' of bear market. Its would be fair to look at what the numbers tell us.
So how do you know if this is the top?
All Time High (ATH) point is always different, today would be different from what it was 3 years ago, assuming the market has been going up during this 3 year period. In fact we are witnessing new highs, almost everyday.
Next, you need to find a reference price. This reference price is needed to test the following hypothesis – Yes the market made a new ATH, but from where did the price move start?
This ‘where did the price move start’ question requires us to use some sort of reference price, and let's use the 200 day moving average. (You can use other if you want).
This is NIFTY50's end of day chart since 1995 with 200 Days Moving Average
If you notice once the price keeps coming back to the 200 DMA and irrespective of which side of the DMA it got extended.
For instance we were down 35% from the 200DMA in March’20 and as of today we are up 24% from 200DMA.
This getting back to the ‘mean’ is known as Reversion to the mean (RTM).
RTM is the tendency of the price to move to its mean over time. Typically, price moves away from its mean and then goes back to the mean, while the mean itself may move up or down.
Below chart shows ‘% from 200 DMA’, on both up and the down side, you would notice that the moves are bounded around 20% to 30% most of the time, before it goes back to the mean.
Are we about to face a Market Crash?
What do we mean by a ‘crash’ is "an EOD price-close below the 200 DMA".
We use NIFTY EOD data since its inception i.e. Jan’94. From that data we draw a 200 day moving average, and filter out trends which have lasted greater than 90 days. A trend here means, EOD price being above the 200 DMA value.
Since 1995 there have been 15 such instances.
Finding out mean, median and Standard Deviation:
Count, N: 15
Sum, Σx: 4011
Mean, μ: 267.4
Median : 183
Variance, σ2: 28326.90
σ2 = Σ(xi - μ)2/N
= (126 - 267.4)2 + ... + (145 - 267.4)2/15
σ = √28326.90
Standard Deviation, σ: 168.30
How long it will likely to take the price to get to its peak?
As per the above calculation, 168 days is a good approximation. We are at 145 days as of now, so perhaps a month more to go.
Once the price hits the peak, how long does it take for it to revert to the mean?
A look at the table tells us that on an average it takes about 50 odd days, Standard deviation being 25 days. So, in general we can say that it might take 25 odd days for index to touch down to 200 DMA from its its peak.
Should I exit my holdings?
Since we’ve already done 145 days in this up-trend, lets go back to all the uptrends which lasted for greater than 145 days to see the returns by 145 days vs. returns beyond 145 days.
As you can see, on an average you get close to 50% returns by the 145th day.
The median and mean both are close to 50% and the SD is at 30%, and we are currently at 24% (up from 200 DMA) at the moment,
So looks like there is a bit more room and one could wait for a bit more.
30% would come to 14170 on the index and that might be the 'peak' of this bull run.
Let's hope for the best and Invest in equities with focus on undervalued quality businesses only.
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