Are We In A Bull Market?

There have been plenty of noise from market participants that we are in a bull market or in the cusp of one. The feel good factor that the election result have given has propelled the markets to new highs but does it have legs? With the Fed not showing any signs of immediate tightening, ECB thinking of their own version of QE and continued easing in Japan with Abenomics, the liquidity situation looks to continue positively for India in the foreseeable future. The fall in crude prices along with other commodities is also very good for India. But are these factors enough for us to have a sustainable rally in share markets?

Three Phases of a Bull Market

Accumulation Phase

The first phase of a bull market is the start of the upward trend which usually comes at the end of the downward trend and is the hardest to spot. This is the time when the informed investors accumulate shares from the market at the heights of pessimism. It will be difficult to spot and there are high chances of you buying into falling knives. From a technical point of view it will be the period of consolidation and will be characterized by market not moving consecutively into lower lows and highs.

Public Participation Phase

This phase is marked by better earnings growth and strong economic data. With the good news more and more investors move back in sending the prices higher. This phase is the longest lasting but also with the largest price movement.

Excess Phase

This is the phase when every Tom, Dick and Harry start talking about the market. As more and more dumb people enter the markets driving the prices to stratospheric levels, smart people will scale back their positions.

It will also be characterized by plenty of IPOs from very dubious companies and people will be in denial about any signs of weakness in the economic numbers and macro indicators. Anchors of business news channels will be gleefully patting themselves in the back and people who warn them will treated like the boy who cried wolf. Terms like Dr. Doom will be coined and when the inevitable crash comes they will treat it with disbelief and some will also claim that they saw it coming.

So In Which Phase Are We?

Lets take a leap of faith and assume that we are in a bull market. We have already moved more than 30% from the lows of QE Taper speak. I have been spoiled by seeing the markets move about 400% during the 2004-2008 period and it is not fair to take that as the standard for a bull market with base effect also coming into play.

So in which phase are we? Ben Bernanke's QE taper talk coupled with the huge fiscal and current account deficits made rupee go into a free fall and markets also fell significantly. That event forced the government to get its house in order and RBI has been rightly stubborn in treating inflation as the big problem and ignored the clamor for rate cuts. We are starting to see some benefits from these actions with the global situation regarding commodity prices also helping.

I think we are in a mini bull market aided mostly by external liquidity and relatively favorable condition India is in with respect to other emerging economies who are either export driven or resource dependent. Things have not changed much at the ground level with the new government still reluctant to take the hard structural reforms that they could with the mandate that they have. I really don't think we will be able to solve the supply side problems without meaningful actions. The banks haven't still solved their NPA problems and the other side of the coin, the over leveraged firms from Infra, Power and Real Estate sectors, continue in their Zombie state of existence. Without solving these I don't think we can have a sustainable bull market because the underlying numbers won't improve much.

If this is a mini-bull market driven largely by external readjustment, then I think we are in the public participation phase. The mutual funds are seeing increasing flows as people move their money from physical goods like gold back into financial markets. I can't see much value out there and so I think we are very much in the latter part of the public participation phase. IPOs are kicking in and government is planning to divest its stake in some of the PSUs like Coal India. I don't think we are in the excess stage yet because there are still plenty of doubts out there. We need to see a higher level of craziness....People need to go full RETARD...

References:
http://www.investopedia.com/university/dowtheory/dowtheory3.asp