Lets Start by
Theodore Roosevelt famous Quote : “The more you know about the past the better prepared you are for the future”.
There are various evidences from the recent history that we are heading towards recession phase
Let us look back to history of recent previous recessions, First one 2000 tech bubble and the other 2008 financial crisis.
There are some similarities which can be drawn from previous recessions.
As you are aware every market cycle consists of 3 phases to complete one cycle:
- Growth Phase
- Slowdown Phase
- Recession Phase
First, let us understand Nifty PE;
Nifty PE: Nifty PE ratio measures the average PE ratio of the Nifty 50 companies covered by the Nifty Index. PE ratio is also known as “price multiple” or “earnings multiple”
If P/E is 15, it means Nifty is 15 times its earnings. Nifty is considered to be in oversold range when Nifty PE value is below 14 and it’s considered to be in overvalued range when Nifty PE is near or above 25
The market quickly bounces back from the oversold region because intelligent investors start buying stocks looking to snatch up bargains and they do the exact opposite when Nifty P/E is in the overbought region.
Since NSE started, every time when Nifty’s Price/Earnings ratio exceeded 22, the average return from Indian equities over the subsequent three years became negative.
Nifty PE table
Nifty PE chart
Nifty Monthly % return chart:
2000 Tech Bubble Crisis:
Here Nifty PE has reached “Overvalue Zone” i.e, above 25 and Peak was 28 During the month of Jan, Feb and March of 2000 refer( Nifty PE table)
OCT 1998, Nifty was on 800 levels and it rallied upto 1800 levels during Feb 2000, 125% returns in 15 months
and in Next 3 months Nifty corrected from top slided down 33% and again there was retracement for 2 months of 30% and thereafter further fall to 841 levels in 17 months.
So, total down from the top levels to 56% (850 levels)
Total duration of Bear market lasted for 19 months
Fig 1 Uptrend of 125%
Fig 2 Correction of 33%
Fig 3 Retracement of 30%
Fig 4: Recession Phase markets 56% down which lasted for 19 months
Fig 5: Market cycle of 35 months
2008 Finiancial Crisis:
Now, lets do similar analysis for 2008 crisis
Here Nifty PE has reached “Overvalue Zone” i.e, above 25 and Peak was 28 During the month of Nov, Dec of 2007 and Jan 2008 ( Nifty PE table)
JUN 2005, Nifty was on 2000 levels and it rallied up to 6300 levels during Feb 2000, 225 % returns in 32 months
and in 1 months Nifty corrected from top slides down 31% i.e(4400)levels and again there was retracement for 2 months of 20% (5300 levels) and thereafter further fall to 4100 levels in 10 months.
So, total down from the top levels to 64% (2252 levels)
Total duration of Bear market lasted for 14 months
Fig 6: Uptrend of 235%
Fig 7 :Correction of 30%
Fig 8: Retracement of 25%
Fig 9: Recession phase 64% which lasted for 14 months
Fig 10: Market cycle of 46 months
And Finally 2020, Health sector Crisis or Corona Crisis
Here Nifty PE has reached “Overvalue Zone” i.e, above 25 and Peak was from July 2017 until Feb 2020. (Nifty PE table
MAR 2014, Nifty was on 6300 levels and it rallied up to 12300 levels during Feb 2000, 96% returns in 75 months
and from from FEB 2020 2 months Nifty corrected from top slides down 40% and now again there is retracement happening which is presently at 24% (9291 levels) which may lead to 30% considering previous recession i.e( 9370 levels), this time retracement likely to be 50% (9976 levels)
Fig 7: Uptrend of 96%
Fig 8: Correction of 40%
Fig 9: Retracement of 25% (till now)
Considering the above analysis from two previous recessions, Now, Lets try to answer following Questions
Will Nifty breach previous low of 7511 or will it breach 6340 levels from where bull market started from MARCH 2014??
As per previous 2 instances, Nifty is likely to break 7500 levels in coming months. but will Nifty break below 6340 levels really we will try to figure out.
Let’s try to interpret from previous two recessions, Nifty never broke below the levels from where the growth phase started
During Tech Bubble
During Financial Crisis
So, Considering Nifty 6340 from where the growth Phase started, probabilities are one will 5.97% during tech bubble and 18% on Financial crisis
6340 * 5.97% = 6718 levels
6340 * 18% = 7481 levels
6825 level which was the low of Jan 2016
One more observation is, On tech bubble total draw down was 56% and on financial crisis it was 64%, interpreting the same for this crisis, then,
Nifty recent high was 12430, considering the draw down as 56%, Nifty may touch levels of 5520
Nifty recent high was 12430, considering the draw down as 64%, Nifty may touch levels of 4490
What will be total duration of this Bear market ?
During Tech Bubble , Bear Market duration was 19 months and on Financial crisis it was 14 months, Assuming to be lesser compared to previous recessions
And Finally, interesting thing noticed on Nifty Monthly % return chart was
During first 4 months,
2008: -17% + 2% + -9% + 9% = -15%
2020: -2% + -6% + -15% + 8% = -15%
" By Failing to prepare you are preparing to fail" -By Benjamin Franklin
Thanks For reading