Analyzing the Stock Market Trends: Are We at the Bottom?

 

In the past few months, the stock market has faced considerable corrections. The big question on everyone’s mind is whether this trend has come to an end or if there is still more to unfold. 

In this blog, we will dive deeply into key data points and insights that will help you form your own conclusions about the current market outlook. Here, we will cover five important factors that provide a comprehensive picture of the market dynamics.

Understanding the Monthly Chart Trends

Let’s start by examining the monthly chart data for the Nifty index. Over the last four months, the market has been consistently negative. 

This is a rare occurrence, as historically, we have not seen such a trend for a long stretch. The last similar instance was back in 2022 when the market was down for three consecutive months. 

Even during the COVID-19 pandemic, we only observed a three-month consecutive decline.

What’s particularly noteworthy is that this four-month negative streak was primarily driven by heavy selling from Foreign Institutional Investors (FIIs). Their continuous selling has contributed significantly to the negative sentiment in the market.

Given this context, one logical expectation is that after four months in the red, we might see some bounce back. 

The market has recently shown signs of reversing, especially in the last couple of days. If the RBI news is favorable, it could trigger a perfect scenario for a bounce back.

Evaluating US Market Trends

Now, let’s shift our focus to the US market trends. A significant indicator of market performance is the relationship between the S&P 500 and the Earnings Per Share (EPS) growth rate. 

The blue line in our analysis represents the 10-year CAGR returns for the S&P, while the yellow line shows the EPS growth rate.

Whenever the yellow line (EPS growth) lags significantly behind the blue line (S&P returns), we often see a market correction. Currently, the US market is performing well, but the earnings growth does not match the stock price increases, indicating a potential correction phase ahead. 

If the US market begins to normalize and align with its earnings growth, we might witness a similar correction in the Indian market.

Long-Term View of the Dow Jones

When we look at the Dow Jones chart, it appears to be stable. The long-term view indicates that it remains above the 20-week and 50-week moving averages, which suggests that there’s no immediate cause for concern. 

However, if any disruptions occur in these charts, it could serve as a significant trigger for the Indian stock market.

It’s crucial to remember that our market has already demonstrated a four-month correction. 

The expectation is not that it will continue indefinitely, but rather that it will stabilize or bounce back. The US market’s stability is key to our recovery.

Analyzing Small Cap Indices

Next, let’s discuss the small-cap index. Historically, small-cap and mid-cap valuations have been under pressure, and they are currently at a critical point. 

The recent correction has led to a 15% decline from the market highs. This drop is not as severe as previous downturns, but it indicates that there is still a level of discomfort within these segments.

We need to tread carefully here. If you have significant exposure to small and mid-caps, it could be risky. The bounce back we are witnessing may not necessarily indicate a return to previous highs. 

This is not the time to become overly excited; rather, it’s a moment for cautious optimism.

Trading Strategies in the Current Market

Now, let’s talk about trading strategies. The current market environment suggests that swing trading opportunities may be present, but long-term positional investing might not be advisable at this stage. 

The market is still in a downtrend to a neutral trend, and the overall breath of the market remains weak.

It’s essential to avoid thinking that the bottom has been reached just because there’s a slight recovery. The market could still experience fluctuations, and it’s vital to keep an eye on the broader trends and indicators.

Future Market Expectations

Looking ahead, the factors to monitor include the FIIs' selling trends and the performance of the US market. 

If confusion arises in the US market or if we see signs of further corrections, it could impact our market significantly.

To conclude, while we may see some short-term relief, the underlying market dynamics suggest that we should remain cautious. The potential for further corrections exists, and it’s prudent to stay informed and ready to adapt our strategies as new data emerges.

Remember, the current bounce back does not guarantee a new rally; it could merely be a temporary reprieve.

Conclusion

The stock market has been volatile, and while we may be seeing some signs of recovery, it’s crucial to approach the situation with a mix of optimism and caution. 

Keep an eye on the key indicators we discussed, and make informed decisions based on the evolving landscape.