How do we know if market is recovering (time to enter)

In the recent blog i mentioned what should a retail investor do when they see market crashing (https://askkuberupdates.wordpress.com/2016/01/08/what-a-retail-investor-should-do-when-market-crash/). There i mentioned one should collect some cash while market is crashing badly even it means booking some losses and sit tight for opportunity for bargain hunting. In the above post it was also mentioned that one should distinguish with market crash and small corrections to make sure one is not making a mistake of selling stocks on minor correction. From the nature of beast current market fall is not correction but a real crash and below mentioned criteria applies.

Previous blog raises the question how do a retail investor know if market has bottomed out and he can add some positions. To get answer of this question I looked at historical index price chart and found the same pattern in previous market crash. From previous price chart i will like to draw some conclusions. Before jumping to conclusions we can see similar (crash) trend happened on 2011 and lasted for one year. Figure 1 is the NIFTY chart for period Oct 2010 to October 2011. Figure 2 have the NIFTY price chart from Jan 2015 till date. If you see closely both chart have the same pattern. Also we can see in the end of 2011 crash market was volatile but it was range bound too. One can say similar pattern happened in Feb 2011 till Mid march, how do we know that was a false rally. This can be answered by the red line in 2010 chart. Around that period bottom line was not converging while in the later part we can see resistance and support line converging.

In brief i will advice to wait for range bound and volatile market for bargain hunting.

Figure 1

Figure 2

Cabinet clears new crop insurance scheme – different angle

When i saw this news one aspect was very well highlighted by media that farmers will get ensured for income from their farm land. Hence i am not going to deal with that aspect here. Instead i wish to bring readers attention to few other aspects of this scheme. These aspect will play a long term cleanup of agriculture sector and help in bringing efficiency.

Documented Income

When a farmer has to go for insurance, expected income from his land will be calculated in order to ensure the insurance benefit. Shall he under estimate his income or over estimate? Whatever it is but farmer income will be documented, although not taxable. This will bring white money in the system. Since farmer income is not taxable till now, there is no incentive for farmer to declare it. But this will open the window for him to declare close to actual.

Land Dispute

Second aspect will the land ownership and land size. When insurance policy will be written, farmer has to declare the ownership of land and also land size. I can see this will result in attempt to clear the land title by most of the the people who are fighting in court. Also we will see digital records of farmers within a decade. I don’t have the data about the number of land disputes pending in court but it is clear that is makes one of the largest section of pending cases. 

Farmer Loan

Other aspect will be farmer loan which has to be written off due to bad crop. This loss was borne by the banks till now. Since farmer is getting crop insurance, soon the should be linked with farmer loan. Also bank should charge less interest because insurance is reducing the risk for bank asset.

With these side benefits ultimately success will depend on how many private players joins in this market and penetration to the real mass. 

One such attempt of introduce affordable housing loan changed the industry and it It took almost two decades by housing industry to come in current state. Now even a 30 year old earning Indian can dream of having his own house. It was not possible till 50 years of age in 1990’s. There is still lot of scope to cleanup housing industry but believe me even today it is much better then it used be to 20 years back.

What a retail investor should do when market crash?

I am sorry but you might have to wait for an answer. By market crash i mean selling across all the companies in major market index like we are seeing now a day in China. Crash is not limited to one or two companies but a broader market across various industries.

Let us try to understand what goes on when market crash, who is trying to sell stocks? Do you think these are bunch of retail investors, executing co-ordinate selling ? First retail investors represent only fraction of total market capital. In India only 4% of market capital is owned by retail investors (source https://www.valueresearchonline.com/story/h2_storyView.asp?str=28417). Such a small percentage can not impact market even all the retail investors act together. Also there is no way retail investors can co-ordinate their act in such a big way before being in news. If these are not retail investors then who is selling ?

If these are not retail investors then these should be among FII, Mutual funds, Domestic Institutions or big individual investors (with large investment). These investors does not make decision based on emotion or news stories but based on real and insider information about economy and companies, which a retail investor can never have access to. Not only information these investors are also running complex models to forecast the economy. So this class of investors have information as well resources to carry out such a massive selloff. When many of them have the same belief in the economy or state of affairs based on the recent fact, they all tries to get out of their investment ASAP, which cause a massive selloff. They have firm belief that economy is not going to recover soon and little loss today is better than holding the investment and take a bigger hit.

Let me explain the last point from recent economic crisis of US subprime mortgage. Look at chart below to get an idea about the dates (source finance.yahoo.com). Bear stern was the first major casualty which happened on March 14, 2008. Market crashed around that time and lowest level Dow Jones reached was around 11740. After that Lehman filed for bankruptcy on September 15th 2008 and market crashed and lowest level of Dow Jones was 10609 around those days. But market saw further bottom from that point and lowest Dow Jones level was around 7550, which happened few months down the road. Think of investors who sold the stocks around March 2008 or Sept 2008, they saves 30-40% of their investment from falling further. Hence they took the losses on those market plunge to save 30-40% of value, which they foresaw happening few months down the road.

Based on above analysis my advice will be when earthquake comes, don’t stand by and watch market falling, instead you should also run. Get some cash from your holdings which you can use to buy stocks at bargain in coming months. One more point to clarify, this is relevant to economy which is impacted. In today’s scenario if China’s economy is crashing than above analysis is relevant for Chinese stocks. No doubt other economies will get impacted too but its impact will be limited to few sectors or area of economy. Here also retail investors should take the clue from our local Institutional investors and watch what they are doing