Bear Market Corrections & Sensex

Today there was a very good interview in CNBC of Mr Ridham Desai, MD Morgan Stanley India. The topic of discussion was the current Bear Market in India and how long will it pan out before we can resume our rallies again. Well according to it, the bear markets usually end when we have higher tops and bottoms. And as pointed out the past 2-3 bear markets have lasted from anywhere between 1-2 years. Going by the same logic, the current bear market is already 6 months old, so we still have atleast 6 months to a year more left to go. Although the view point was that we would see the end of this bear market much before the 2 years period. Also another interesting point noted was that bear markets end when there is a screaming valuation in the market. Usually that happens when the retail also capitulates and there is wide spread selling, so the stocks would fall from their fair value and there is tremendous opportunity to buy. As recalled by Mr Desai, a point wherein one would want to sell ones house and buy equities!!!

In 2003, when the current bull market started we were quoting a PE of around 8, now if we are to end this bear market at a multiple of 8, that would mean a sensex of 8000!!! That in my opinion will not happen, but a multiple of 10 odd cannot be ruled out as pointed by many experts (though personally I feel even that will not happen), so the worst case scenario projection is 10,500 as pointed out by experts. Also point that was noted was that bear markets usually end with 50% fall from the top of the bull market. Going by the same logic again the figure comes to 10,500 for the sensex.

One more fantastic point that was mentioned was that Bond Yields and PE are inversely correlated to each other. The bond yields currently are at a very high level, I think quoting at close to 10%, which is very very high, so a PE contraction cannot be ruled out as we are currently witnessing.

My own opinion is that if we see markets at 10,500 or below it would indeed be a very very lucrative option to buy into equities from a fundamental perspective.