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August 18, 2022

Itax Software

Income Tax Software

Nifty 50: Is this the end of the bear market? Let’s do some data crunching

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greed And fear are the two most powerful emotions that drive the market. The market offers the best opportunities when it swings to either of these two extreme sentiments.

nifty 50 is down about 18% from its October 2021 high of 18,604. Mid-cap and small-cap indices have entered a bear market, falling over 20%.

Now the question on everyone’s mind is this is the end of the bear market or will we fall further? To answer this question, let’s understand how you can measure these two feelings of greed and fear with the help of numbers.

The fall of Covid-19 is a classic example of the fear gripping the market. When a stock trades above its 200-day moving average (DMA), it is considered to be in a long-term uptrend. When the majority of the shares are in their 200 . doing business above DMA This is considered a bull market.

During the Covid lows, only 10% of the Nifty 50 stocks were trading above their 200 DMA. This was the lowest level recorded since 2015. There was an extreme level of fear in the markets. And guess what… there is a market fall.

Image 3ETMarkets.com

% of Nifty 50 Stocks trading above 200 DMA (Source: Chartink)

The situation today is similar to what we saw during the pandemic. As on June 20, 2022, only 14% of the 50 Nifty stocks closed above their 200 DMA, which is the lowest in the last eight years excluding the Covid-fall. Apart from this, the PE of Nifty 50 is now trading at 19.07 which is below its average level of 20.48. During the Covid lows, the Nifty’s PE had come down to a low of 17.15. The current PE of Nifty is just 11% above its covid low. If you consider the current WPI inflation of 15%, then Nifty is already trading below the valuation of COVID.

The practical aspect is also indicating an extreme apart from the basic and technical. The sentiment in the market is so pessimistic that a Google search for the term “bear market” has recorded the second highest reading since the Covid outbreak.

Image 2ETMarkets.com

The term “bear market” trending on Google Trends (source: Google Trends)

All this indicates extreme fear and pessimism in the markets. Now what to do when there is too much fear? Warren Buffett Will tell you to be greedy when everyone else is afraid.

Just 2 months after the Covid fall, the index saw a staggering 32% return. A year later, the Nifty 50 index had almost doubled. It was one of the fastest rallies in Indian markets in a year.

From where we stand today, there will be doubts when investing. But the risk-to-reward ratio is very attractive. The downside risk seems limited from here. We may be closer than we think to another GREED ride.

Market participants may view this as a buying opportunity to accumulate strong stocks with strong fundamentals, free cash flow and low leverage, while ignoring short-term hiccups.

Technical Outlook

Nifty 50 index closed positive after full week trading. It has formed a Bullish Harami candlestick pattern on the weekly charts. The market sentiment is mostly on the negative side as every bounce is selling. However, Nifty is getting rejected at lower levels which also coincides with falling channel support.

Falling support on similar lines is seeing a jump in many major global indices. This indicates the possibility of a brief bounce-back rally. We suggest that traders should remain neutral with mild positive bias till Nifty breaks below the immediate support of 15200. Immediate resistance is now placed at 15900.

Image 1ETMarkets.com

expectations for the week
Markets may be affected by an important economic calendar in the coming week. To begin with, all eyes will be on US quarterly GDP growth figures. If US registers negative growth then it will officially enter recession which could weaken the market sentiment.

Back home, auto sales numbers will continue to drive stock-specific movements on D-Street as investors try to decode a future trend.

Moreover, the second half of the week may witness whipsaw movement in the indices due to monthly F&O expiry. In the midst of volatility, investing in fundamentally resilient stocks in a phased manner would be a good approach. Nifty 50 ended the week at 15,699.25, up 2.65%.

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