Friday, March 27, 2009

Is it the end of the Bear market?

The last 3 weeks, the markets have rallied about 23 %. This is the most in the last 15 years.

The experts have started proclaiming its the end of the bear market, a new bull market arises.

I would be very circumspect now.

Lets see what has taken the markets up:

1. Slew of announcements from the US government. Toxic Assets clean up plan has been touted as the fix-it all. Its allowing the private companies beneift from the mess they created in the first place.
2. Massive short covering. All the bears were caught on the back foot. I am sure the Option Writers must have been butchered completely.

Have the fundamentals changed so much in the past 3 weeks that we have rallied 23 pc up?

Whenever there is a sharp up move or downmove, there is a reaction. Bear markets simply dont take u-turns almost overnight.

Now everyone is turning bullish. The aim of the market movers is to catch everyone on the back foot.

Once everyone including the most sceptic has turned bullish, there would a fall.

The bears have been slaughtered. The Bulls will be the next.

Even during the Great Depression, Dow had rallied almost 50 pc from its base, before collapsing again.

So what would I do:

1. I would simply wait and watch. Buying after a 23 pc rally makes no sense. The risk reward would be skewed in favor of the risk now.

It is quite likely that we would continue the rally for 1 or 2 weeks more.

The elections hang like a albatross round the markets neck.

Hung Parliament with a run-up would be a recipe for disaster.

The toxic asset plan looks good on paper, I would wait for its implementation. Obama's style is good, talk up the markets. I would like to see the results. Its a dangerous game. Talking up the markets if you dont deliver than the fall would be steeper.

I would prefer to stick to Gold for the next 2 years.

I am done with my FD investment in December when the rates were attractive. I have locked in my investments for 5 years.

My next Gold allocation, I would start to look building now. My logic is if the dollar collapses, it would be sometime in the next 12-24 months. The time to build is now.

I would look at my equity allocation last sometime in May-July horizon.

Post that, sit back and watch the fun. The stocks I am looking are almost at 25 pc of their peak value. Even if they rally 50 pc from their bottom, they would still be at 37.5 pc of their peak value.

I would rather buy on the leg up, than the leg down.

I am not convinced of this rally sustaining for a very long time.

The Full year results are the key.

This rally would definitely be good for year end bonuses. Nifty at 3100 certainly looks better than Nifty at 2500 for your NAV. ;-)

Happy Gudi Padwa.


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