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Home > India > Business > Columnists > Guest Column > Devangshu Datta, Mukul Pal & Vijay L Bhambwani

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Outlook for markets in 2009

January 05, 2009

After enjoying three years of nearly 35 per cent plus returns, investors burnt their fingers as the Nifty plunged over 50 per cent in 2008, making it one of the worst years in market history.

The credit problem that engulfed western markets left its mark on the Indian bourses as well, as FIIs started pulling out of the markets here to bridge the liquidity shortfall back home. While the markets have recovered 36 per cent from the October lows of 2,252, chances of a sharp recovery on back of a sluggish economy are rather bleak.

While the government is pulling out all the stops to stem the slowdown in demand, the biggest risk for the markets in 2009 is political uncertainty. Three technical analysts scan the charts and tell us what to expect from the year ahead.

Second half of 2009 to decide direction

Devangshu Datta

Since early January 2007 and a record high of 6,357 points, the Nifty has been sliding. The years low came in late October when it hit 2,252, for a peak-to-bottom retraction of 64.5 per cent. By any standards its a big bear market. Although it has rallied 800 points in the next two months, its still 53 per cent off its peak values.

This is the biggest-ever retraction recorded in an Indian bear market and it comes in the wake of the biggest-ever bull market.

How long can the bearishness last and how deep can the correction go? We are in the midst of a global meltdown which means the universal sentiment is doom and gloom. The liquidity crisis has absorbed massive bailouts without recovery. In India itself, GDP estimates and most company-specific earnings projections suggest that FY 2009-10 will be disappointing.

There is also the spectre of political uncertainty with a general election due. Markets hate uncertainty and there will be unwillingness to invest until the next government is formed. If there is a hung Parliament, which is very likely, there may be panic as in May 2004.

This means ample triggers for the downside. Time calculations and chart projections also suggest that prices could dip in the timeframe of the next six months. Before getting into forward projections, lets define some levels and associated trends:

If the bear market remains in force, 2,250 will be broken to create a pattern of lower lows. If there is a bullish trend reversal, the confirmatory signal will be the market climbing above its own 200 day moving average (DMA).

The 200DMA is a moving target, currently between 3,800-4,000. The third possibility is, the market will hold above 2,250 but fail to clear the 200DMA. In that case, there will be range-trading.

Regardless of market direction, intra-day and week-to-week volatility may be high. Trading volumes have shrunk as is normal in bear markets. The advance to decline ratio is likely to remain negative. The primary market is in stasis and big IPOs are unlikely. These are all bearish factors but they could be overcome.

Now, lets look at possible bear-market retraction targets. The market rose some 325 per cent over 57 months (April 2003-January 2008). In terms of time, the retraction could easily last around 19 months (one-third of the uptrend) or more. That suggests the second half of 2009 is when one should look for a turnaround. In terms of price retraction, 2,250 was an important support level. If 2,250 is broken, the next support is at 1,900-2,000.

Among the key factors to watch will include FII attitude, which was massively negative in 2008. If the FII attitude changes or at the least, the pace of selling eases, pressure will come off the market. One can hope that those FIIs who were bearish have already sold. It is unlikely that domestic institutional attitude will change much. DFIs were mildly positive through 2008 and they will probably stay on the same page.

There are positive factors, which could lure some long-term investments back. Interest rates are likely to fall since T-Bills already have. Also, many stocks and the major indices are at attractive valuations in historical terms. Both are bullish factors. Everybody is expecting bad news on the earnings front, which also creates room for positive surprises.

In terms of chart patterns, weve seen a bottoming pattern over the past three months. It appears that pretty solid support has formed between 2,500-2,800 with a secondary support at 2,250. Even a little rally could reach 3,600 but there is a huge resistance there.

My best guess is that the market will continue to oscillate between 2,500-3,600 until June or July 2009. Intermediate downtrends during this phase will test supports at 2,500 and perhaps 2,250. Uptrends will test resistance at 3,600 but not generate sufficient volumes to penetrate it. This is a wide trading range of around 15-20 per cent in either direction from the current price. That offers ample scope to traders.

A clear sense of direction will only evolve in the second half of 2009. If the market clears the 200DMA and sees a volume pick up, the worst will be over. If the market drops below 2,250, we are in for another 9-10 months of bearishness (until April 2010).

Short-term traders should watch the 10-DMA closely. The first danger signal of a short-term correction will be the piercing of this support line. Another danger signal to watch for is a time-period where domestic funds and FIIs are simultaneously sellers.

Beating the market

Mukul Pal

The first rule of investment psychology is that mastering the market is easier than mastering yourself. Behaviorologists put it differently. They say that if a majority cannot do it, then beating the market is an illusion. The subject has merit, but the gurus are still busy highlighting how flawed conventional technical and fundamental research is rather than making predictions themselves. They also say that market behaviour is like the toss of a coin, markets cant add and subtract, more risk does not mean more return, beta is dead and as are other generalisations.
Behaviorologists dont have a strategy for 2009 or till 2012. The subject still focuses on the mistakes of majority, rather than the approach of smart investors like John Paulson, who pocketed a billion dollars betting on the crisis. And he was not just alone. Jim Simons of Renaissance Technologies delivered 58 per cent returns for 2008. A specialist in risk arbitrage, Paulson topped the charts by minimising market correlations and long short risk arbitrage strategies.

And some of these funds have survived despite a 40 per cent fee. They delivered more than 70 per cent annual returns in 2007. A recent Bloomberg story on richest hedge funds only confirms the point further that for a majority crying over a crisis, there will always be smart investors thriving. Medallion is almost exclusively owned by Renaissance employees, who include mathematicians, astrophysicists, statisticians and computer programmers. Just like others, they too search for patterns.

We started the year with the call of decade high on Sensex in 2008. We saw the drop till January 21 as a correction when we wrote Understanding corrections. We projected 18,000 as a key inflexion point. Prices pushed up from 15,332 till 18,895. Later, on March 31, we wrote about the Three legged bear, when we said, Though marginal, we have seen an intermediate low in March. The prices continued to hold up till 16 May, as prices continued to hover near 18,000 levels (17,735).

Then we had the August 4, The late economic cycle write-up, where we talked about abstaining from early and mid economic sector components. It was then that we clearly shifted our stand from investment to trading and talked about few weeks of upside and how a bounce back till Q1 2009 was a low probability scenario. We said 18,000 was a best case. Prices bounced till 15,579 and turned back on September 11, 2008. We also wrote about The OCT decline where we said October lows have extreme sentiments linked to them, making them potential bottoms. Not only did prices fall from a high of 15,107 by 50 per cent till 7,697, but October 27 lows held and prices moved up 42 per cent. We are in January 2009 now and we dont have a turn down yet.

If you ask a behavioural guru to define accuracy, this is what he will say. The difference in forecasted and actual is accuracy. According to fractal geometry, this is incomplete information. It is the degree that you are studying, which will define accuracy. Degree, meaning the time frame, multi month, multi week, multi day or multi hour. Accuracy on different time frames will be measured differently, and this is one huge gap in the subject, as it does not define the concept of a degree.

In the last one year, there were nearly 13 intermediate (multiple week) trends and about 40 minor trends (multi day) that we tracked. An average intermediate move was about 23 per cent. The total absolute actual move on Sensex for the year (both up and down intermediate trends) was above 300 per cent. A real accuracy report should be benchmarked against this gross move and not just against the net Sensex return for the year (-56%), which is normally done.

What now? Starting Aug 1992, Sensex has shown an average 40 month cycle. Three of the 40-month cycles make a decade cycle. The first decade cycle ended in 2002 and the second decade cycle should end somewhere around 2012. We are now in the last 3.3 year up cycle. Since the markets have erased most of the gains made since the decade up cycle which started in Sep 2001, the expected bounce should be choppy and time consuming.

We wont be surprised if prices retest October lows or breach them marginally in early Q2, 2009. And this means selective stock picking and  minimising market exposure by doing quantitative long short strategies. 13,000-15,000 is an achievable high for Sensex in 2009.

BSE Metals was the worst performing sector of the year at -72 returns. We expect it to deliver better returns, at least for Q1 2009. We also expect BSE Oil to outperform Sensex over Q1 2009. Indian markets still lack instruments for doing advanced quantitative strategies. But long BSE500 and short Sensex also seems an attractive pair for Q1 2009. In conclusion, don't get too much into the negative mode despite all crisis and a majority of this is foolish talk.
Try looking top down, give more weightage to back tested systems, understand fractals and cycles and read behavioural finance, it will definitely help you remove biases, even if it does not give you a market beating forecast.

The author is CEO, Orpheus CAPITALS, a global alternative research firm.

2009 better than 2008?

Vijay L Bhambwani

The calendar year 2008 has been a painful one for most players as the NSE headline index lost 65 per cent from peak to trough (6,3572,252). Though the closing was way above the yearly lows, the overall outlook remained under pressure. For the year 2009, the players will experience this pressure on the upsides as an omnipresent phenomena.

As the markets edge higher, bulls trapped at higher levels will provide selling supply as their break even levels are reached or losses are reduced to acceptable levels.

This concept of selling supply is known as overhead supply. 2009 promises to be a year of overhead supply of a magnitude not seen by an average Indian investor so far.

This is because the markets have become gigantic in the last half a decade that the bull run lasted, and so will the exit pressure. However, it is not all negative. There will be pockets of strength and the bulls will continue to attempt a revival in the markets.

After the steep decline of 2008, I expect the recovery process to commence in earnest in 2009. Therefore, the patterns on the weekly/monthly charts will be that of U shaped recovery rather than a V shaped one.

The coming year will see the bottom part of the recovery process. Should there be no adverse development (escalation of the West Asian strife, Indo-Pak tensions and the like) or natural calamities, October 2007 may have been the panic bottom that the markets invariably make before starting an upward trajectory.

Should this bottom be violated, and violated forcefully, the decline can extend up to 1,800 levels. The magnitude and velocity of the decline will be determined by the volumes and open interest behaviour on such a draw down.

As far as upside levels are concerned for 2009, the Nifty 50 will witness a stiff resistance at the 3,800 levels which is the primary upward target for any serious pullback rally. Should this hurdle be overcome, the next target will be the 4,350 levels where even more serious selling pressure is likely to be seen.

A complete trend reversal can be concluded if and only if the Nifty stays consistently, forcefully and qualitatively above the 4,350 levels. That alone will draw the bulls back in the fray in large numbers that is required to re-ignite the market sentiments.

Since ellioticians believe that the markets undergo a paradigm shift after a 5 wave move terminates, the tone and tenor of the next bull market (if it commences in 2009) will be different from the last one which flagged off in 2003.

The erstwhile market favourites like real estate, brokerages, infrastructure may lose some and\or most of their fancy with the market players. New players, stories and themes will have to be in place before the market signals a total turnaround.

Sectors that hold promise are education, specialty electronics, power, banking and energy. As per time/price analysis, the most pessimistic deadline for a new bull phase to commence is up to October 2010.

Which makes the calendar year 2009 a critical bridge between a bottom formation and a new bull phase. In the worst case scenario, this will be the year when the bulls will start hunting for their next favoured stocks.

In the best case scenario, they would have already started buying in respectable numbers. All in all, 2009 is unlikely to be significantly worse than 2008, all things remaining constant.

The author is an investment consultant /trainer and CEO, He invites feedback at He has equity investments in sectors recommended above and has a vested interest in the bullish outlook.

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