If you had direct or indirect equity exposure and did not know what happened on Monday, you deserve an award! Couple of charts, plus thoughts on the 6-8% drop in Indian indices.
Why did markets “crash” ?
Firstly, it is not a crash. A single day upward spike is not called a bull run. Similarly, a single day downward spike is not a crash! All we can say is that it is a sharp movement triggered by a domino effect -China, Europe, US. I don’t really care. The cause will not help me much.
Secondly, it is atrocious to label the movement as “Black Monday 2015”, “Monday mayhem” or “meltdown”. These are merely attention-grabbing headlines (yup, guilty as charged!).
Thirdly, such “corrections” are part and parcel of market movements. In fact, much larger falls have occurred right in the middle of a bull run (said in hindsight of course). See more here: Anatomy of a Bull Market
The red dots in the graph below represent all the days on which the market fell by 4% to 6%.
More such graphs can be found here: Worried about a 2% single day fall in indices?
Such “crashes” are just all in a day’s work for the market.
Did you see as much noise from the media and your social contacts during those two days marked in green box in the top graph?
The reason for so much buzz (if not fear) now is because many invested after the market began to move up. When a -4 to -6% movement occurred when the market was listless, not many made a ‘big deal’ about it.
A sharp drop during a “bull run” is enough to separate the men from the boys. Much of that ‘buzz’ seems to be from people busy posting and tweeting, “stay calm and buy more”.
Panic is a good thing for your portfolio!
Before “educating” people to hold on or to buy, may I urge you to recall that it is called a ‘market’ for a good reason. It involves buying and selling. If all of us remained calm and did not react to global developments, then there will be no one to sell to when we need money. Panic selling (by others) is vital for us to make money.
Is this a good time to buy?
I strongly believe any time is a good time to buy (more on this later). If you purchased units on Monday, I suggest you please look at your finance holistically. Why do you have surplus cash to invest? It is by design or was it just lying around.
A few years ago. I made a decision to not “buy on dips” ( have never done this). It is too stressful for me. I have better things to do than to figure out dips. I feel the happiest when I get rid of the months investible surplus as soon as possible. I also feel happy when the market is heading nowhere – neither euphoria nor despair.
I also think that those who wish to ‘buy on dips’ (if you are comfortable with it) should learn some to study trends quantitatively so that they can establish a ‘low’ or a ‘dip’ better and then buy.
India VIX our volatility index (read more about this here: India VIX: The Stock Market Volatility Index) shot up prominently.
This means, that over at least the next month or so, we can expect the market to be volatile. So there should be other buying opportunities! There is no need to buy in panic!
Are we headed for a crash?
I don’t know. You can use my Moving Average Market Level Indicator to get an idea about long-term market trends using daily moving averages (DMA).
A moving average or a simple moving average is a technical analysis tool in which the actual index data is compared with its average taken over a period of time.
For example, a monthly moving average is one in which the monthly return is calculated, with the duration rolled over by one business day.
For example, if you have data between 1st Jan 1990 to present,
You would calculate the average index value between 1st Jan 1990 – 30th Jan 1990, then between 2nd Jan 1990 – 31st Jan 1990, then 3rd Jan 1990 – 1st Feb 1990 and so on.
Jim Otar suggests the following with two DMAs (read above post for more details):
1) 5-month DMA (blue line)
2) 12-month DMA (red line)
Bearish trend: If the blue line goes below the red line, when the red line is heading south
Bullish trend: If the blue line goes above the red line, when the red line is heading north.
The same graph for the last 8-9 months.
Clearly we need more time to where the markets are heading. All we can say is that the 5 month DMA after an year is all set to cross the 12-month DMA. The trend could reverse too from here too.
Note: This is a broad indicator and should not be taken too seriously.
This was written about 11 months ago: Nifty at 10000 in 12 months? It looked like a long shot then. It certainly looks like a long shot now!
I think we need to wait for at least a few months for the turbulence to settle down and corporate earnings to grow. Until then, the markets are bound to be directionless, like it has been for the last 6 months.
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