Are you ready to climb the Sensex Staircase?!

Published: October 21, 2016 at 1:44 pm

Last Updated on

It can be extremely educative when the Sensex chart is plotted such that past bull and bears runs can be compared to more recent such movements. This can be easily accomplished by plotting the Sensex closing value as a logarithm. This reveals a fascinating staircase pattern that is discussed in this post.

A log chart is also known as an equal interval chart and gives a better visual representation of rises and fall.

Table of Contents

Normal Sensex Chart

Here is the normal Sensex chart.

sensex-plain

The most striking feature of this chart is the 2008 crash and the bull run that preceded it. Details of past market movements are not quite visible.

Sensex Log Chart (plain)

This is the Log (base =10) chart of the Sensex. Notice how past features have now not only become prominent but are also on the same scale as that of newer features.

sensex-log-plot-plain

Sensex Log Chart (annotated)

In orde to get a sense of the features, I had added several indicators  (drawn with the full benefit of hindsight – only for illustration) .

sensex-log-plot-annotated

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The Green lines First let us look at the green line at the bottom left of the picture. It represents the bubble before the Harshad Mehta scam. For a good read on such market bubbles, see Review: Riding The Roller Coaster -Lessons from financial market cycles we repeatedly forget

The increase in Sensex value over the course of this green took  only year! A leap from 3 to 3.6 (log) ~ 0.6(a little more).

Now look at the second green line between the two dotted horizontal lines.   This is great bull in the 2000s. This increase is identical in magnitude to the Harshad Mehta bubble. Except that it occurred over 3+ years.  This is a simple illustration of the power of the log chart.

The Red lines The red lines, as you may have guessed, represent crashes. The Harshd Mehta scandal, the dot-com bust and the 2008 crash are also very similar in magnitude. A fact that the plain chart (top graph) cannot reveal.

The violet lines They represent sideways markets. The first one last more than a decade. The second line is a projection in time. 

Have we recovered from the 2008 crash? If we look at the plain chart, our answer could be yes! In log scale, the recovery (if any) is only marginal.

The staircase pattern should be obvious now. Every big upward movement (so far) has resulted in a prolonged sideways market that would last for years. A fact that new equity investors should be aware of.

Which is why we all need to ask ourselves, am I ready to climb the Sensex Staircase?!

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

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7 Comments

  1. Interesting article. Good way to look and interpret the data.
    The big question – are all stairs of similiar size? Given that this shows only one stair… is it too early to draw on inference of the repeatability of the stair?

  2. Dear Pattu, it may be instructive to see how something with a longer history behaves under this analysis – such as the DJIA. Will the Great Depression or Black Friday also show up as the red lines? Will we see more steps? Do you think it merits a post?

  3. Interesting Observation ! My take from this presentation would be to keep building your capital into the markets in the flatbed area and be there for the next stair jump. But it appears more waiting than jumps considering there are only two stairs from 1990. Thanks for bringing in this perspective !

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