When Do Markets Top Out? - Sainik

Now that the markets are approaching all-time highs,people have begun to debate as to how high they can go. Most experts interviewed in the media are of the opinion that there is still a lot of distance left and targets of 27,000 considered reasonable for end of year.

Most also agree that this market is likely to top out and reverse on some "unexpected" bad news, like global factors, or terrorist activity, or any other geopolitical disaster or financial scandals etc.

Are these assumptions right? Lets examine of a few of the significant market tops:

1992 : Harshad Mehta scam - The Sensex topped out in the first week of April at around. Harshad got arrested only in the last week of that month. There was no sign of "bad news" in the first week of April and since it was the beginning of a new financial year, there was lot of enthusiasm and all-round good news.

2000: The Sensex topped out on Valentine's Day (14th February) , when tech stocks topped out in mid-March, just before Bill Clinton visited India. Again, there was no sign of any bad news and lot of happy anticipation that the President of the US was visiting India after nearly a quarter of century (the last Presidential visit was in 1978 when Jimmy Carter vistied India during PM Morarji Desai's time).

2004 : The markets topped out during the first week of January. This was the day when Jaswant Singh announced a special package for the industry with hordes of concessions. Infosys had come out with blockbuster results and corporate performance was the best ever in a decade. PM Vajpayee had just returned from a successful trip to Pakistan and there was a huge buzz in the air that elections would be called later in the year and the NDA government would be returned to power since India was shining.

2006: After a relentless run during March and April, the Indian markets went on to top out on May 13 , the day Reliance Petroleum was listed at a huge premium and there was enthusiasm all around.

2008: The markets topped out just before Pongal, on the day Reliance Power successfully closed its issue, having been subscribed many times.

So is the case with global markets too. The US markets reached highs April-end when there was no specific "new or unexpected bad news". It is true that once the markets top out , the bad news starts trickling in with reasons for every subsequent fall.

However, it is clear that market have never topped out on bad news. The markets top out, as well as bottom out stealthily, when least expected to.

Just consider the bottom of all markets during March 2009, when there was no news and quietly the markets bottomed out to start a multi-month rally across all asset classes around the world. Hence, we should closely examine the behavior of the markets on the days we get a plethora of good news.

Back to our markets, Satyam announced results for the last 2 years and was promptly met with derision by the global funds who dumped the stock . On Friday it made a low of around Rs 88 and closed marginally in the green. Our analysis shows that it still remains a good long-term bet with low downside.

The capital goods sector showed good appreciation with Bhel leading the pack. There seems to be some more steam in this sector.

The tech sector got a fresh lease of life with the US senate not passing the Outsourcing Tax Bill which otherwise would have had a detrimental effect on the fortunes of the sector. Metals perked up Friday, quite inexplicably, but this is the nature of the bull market.

Banks continue to do well . One can look at private sector banks like City Union Bank, South Indian Bank and Dhanalakshmi Bank.

There was a lot of selling in Pipavav Shipyard since private equity players as lock-in period expired and private equity players exited the stock. It looks interesting as a portfolio candidate when the selling subsides.

The results season will start in right earnest now onwards and the markets are likely to display the typical volatility associated with it. Trade carefully as we enter uncharted territory.

Whatever you are up to , hope its profitable.