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Will the bull market continue?

In the current context, betting is in very bad odour. So, the next question is going to sound in bad taste. After the trading pattern of the last four days when the Sensex climbed nearly 18 per cent, it may also sound as though it is coming from the realm of the absurd. Here goes anyway - what price that India is already on the cusp of a long bear market and the bear grip will become stifling within the next quarter?

Consider the evidence for this supposedly unlikely occurrence. On Black Tuesday, April 4 when the market dropped 7.2 per cent in stark panic, trading volumes were above Rs 90 billion. By Thursday, the bulk of forward stocks were trading below their September 1994 peaks even though the Sensex recovered to stay above the 4643 level of the September 1994 high. The gains had come mostly from the new stocks in the infotech, communication and entertainment (ICE) sector.

The lack of breadth was highlighted when the Sensex rose on Friday April 7 with that record 352-point surge. The Sensex ended 4.35 per cent ahead for the week but broader indices marched to a different tune. The BSE 500 and the BSE 200 were both in negative territory for the week. The advance-decline ratio for the week ending April 7 versus the week ending March 31, was 598 stocks ahead while 1185 stocks were down. Oh, incidentally the Friday price rise came on trading volumes of Rs 1,700 crore - roughly 80 per cent lower than Tuesday's hammering.

The market has continued to move north this week. But volumes have stayed depressed and breadth has also not improved substantially. The four sessions, between April 6-April 11, have generated a Sensex rise of 784 points but combined volumes barely add up to the Rs 90 million traded on that single Tuesday. To a certain extent, the Sensex rise is also a phenomenon driven by the rebalancing of the Sensex, which has induced institutional re-jigging of portfolios.

The low volumes coupled with the lack of trading breadth are both signals of technical weakness. Both would occur if this rise is indeed the proverbial "dead-cat bounce" at the beginning of a new bear market. The volume and breadth weaknesses could also occur in the last phases of a bull market when trading thinned to the pivotals. In the last phase of a bull market, there is little genuine demand because everyone has been bullish for a long time and consequently, everyone has done whatever buying they wanted to do. That often impacts volumes and breadth in this sort of fashion.

This bull market started in early December 1998 - so Taurus has already been running for 17 months. The Sensex has climbed from 2742 points in November 1998 to an all-time high of 6150 points on February 21. That's a rise of 124 per cent. In the great bull market of 1993-94, index prices rose from 1980 points in April 1993 to 4643 in September 1994 - a rise of 134 percent in 18 months.

In living memory, we have never seen a longer bull market than that 18-month rise, although the scam market of June 1991 to April 1992 saw a sharper rise in values fuelled by funny money. The bull market of 1994 also peaked some six-ten months before economic growth actually tapered off under a liquidity squeeze imposed by a coalition that was preparing for elections. So in the light of the past, it is perfectly possible that this economic recovery too could continue for some time even as share market values go nowhere.

There is even a valid economic rationale for that sort of lead-lag relationship to recur. Prices are a function of future expectations and those expectations changed for the worse after the Budget. So, while economic prospects remain good in absolute terms, they are definitely worse than the expectations on February 21 peak. Let alone unexpected good news, even the expected good news had to be discounted again pessimistically after the Budget. Unexpected positive earnings surprises are likely to be few and far in 2000-01. So why would you expect prices to gain across a broad front, which by definition is what you will see in a bull market?

There are other technical reasons for suspecting market weakness in the near future. By definition, a bull market trend will only by maintained if demand is strong enough to force prices past the 6150 mark and hold them above those levels. The breakout in November-December 1999, established technical targets in the 6500-6800 region. That is, approximately 6-10 per cent above the last market high. Even if this current uptrend is strong enough to achieve those peaks, another peak at even higher levels later in 2000 seems unlikely.

The current upmove appears to have started from support around the 4600 region where the market hit three successive intra-day bottoms. This is a higher bottom than the previous upmove from support at 4269 in November 1999. We can thus expect a higher peak than the previous peak of 6150.

In technical terms, the bull market would thus remain alive. But in contrast to the last upmove, which came on high volumes and great trading breadth, this move does not seem to have strong background signals. It is probably the last uptrend before the market starts to slide. So be prepared soon for a much narrower market where some stocks continue to move up while the majority go down.

Devangshu Datta

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