I have shared Neppolian views on markets on this blog in the past. I got one more opportunity to pick his sharp mind to understand the polarization in markets.
Below is the summary of main points
1. Global markets are a fragmented lot. Most Asian indices like Nikkei, Hangseng, Shanghai composite etc topped in Feb 2021 and have been correcting for the last 5 months and have already dropped 10+%.
2. In US too, fragmentation is visible. Even as Nasdaq/SP500 making new highs, Dow Jones Transportation index has been correcting for the past 2 months and RT2000 for the past 4 months.
3. Most European markets have gone sideways.
4. Market internals are crumbling, even as the mainline indices are trading closer to ATH.
5. This looks like the classic reactionary phase, post a big 100% gain period. May continue to rumble like this before a trend resolution is found.
6. In general, reactionary phase or consolidation phase could take the shape of a slow correction or at rare times a sharp collapse. Usually, the developed markets will go through a slow correction and emerging markets a sharper correction. Anywhichways, after a solid run uptrend, a consolidation phase usually resolves in the direction of the earlier uptrend.
7. A repeat of 2020 like quick and deep collapse is ruled out. Markets have a way with not behaving in similar or recent manner eventhoigh most participants may look forward to similar collapse or rallies being themselves anchored to a malady known as recency bias. So we are not likely to get either a deep collapse or a rampant rally for some time.
8. That said, Indian markets are made of stocks rather than indices. In India, there is good participation from across sector. Broad basing is happening and is good for the structure of the markets. Many stocks are making new ATH after 2017-18, especially quality mid and small caps. This is suggestive of leadership through these names for at least next 2-3 years. So large upsides may yet be realizable. So buy on dip strategy will work in such names and sectors. However, unless one is ready to keep or work with a deep stop such names/sectors will practically be not tradable. In India, we have seen a year or year rolling 100% index gains only a few times (91-92), 2003-04 and 2008-2009 and each of these times the indices doubled, either we have seen a sharp collapse or a lengthy time consolidation running into years. Participants may expect a repetition of the past behavior but market may/not oblige.
9. Markets are looking stretched and tired in the near term, but at the same time, setup wise looks structurally long term bullish. Generally, when the markets expand to a new ATH beyond 161.8% measured from the previous bear trend, in future corrections (even the deepest ones) do not fall below the previous top or inverse 132.8% levels…..these levels for Nifty would read as 12500 and 10000 as of now. So, 12500 would require a 20% fall and 10000 would require a 33% fall from current market price. In India 20-30% fall is where most bear market end….barring exception of 2008 and 2020.
10. So in my sense, Long term portfolio can still be built but can be done only if the stops are kept at such levels to persevere at least 20% index correction. Till the markets reach a reasonable support level between 14000-12500, the best strategy would be to hold a very flexible portfolio of momentum + base breakout type stocks. Also, the exit rules will have to be a combination of individual stock based stops or market wide level stops. This would require a mindset to build-exit-rebuild continuously.
11. Also the new clutch of money coming into Indian markets from the retail/non professional group is humongous. We must welcome this money with open arms as these are likely to permanently increase liquidity in the markets…as I certainly feel 90-95% of these Covid19 breed of traders will eventually loose and give a permanent liquidity boost to the professional traders. So deepening of the liquidity in Indian markets is a given.
12. Net net , one must look for opportunities to go long of stocks in meaningful dips. Till these meaningful dips come , run a flexible portfolio.