Scythed Sensex
Source: DNA Money
If the 1,100 point crash on May 22, 2006, provided a great buying opportunity, current price levels must be a steal. Over 800 stocks trading on the BSE have seen a drop of over 25% since their lows on May 22nd, while nearly 1500 stocks (of the total of about 2200 traded stocks) have dropped by 15% or more. An overwhelming majority (over 90%) of the stocks traded on the BSE now trade at lower prices compared to May 22.
But considering that the selling is continuing unabatedly, few people seem to consider even the current depressed price levels as great buying opportunities. Suddenly, the markets seem to be worried about inflationary pressures, higher oil prices and increasing interest rates. Talks that the Indian markets could be in the middle of an extended bear market also seem to be keeping investors away.
It’s important to note here that the Sensex has lost over 28% since its peak about 34 days ago. This, in fact, qualifies for the sharpest correction in the Sensex’s history for a period of about a month. When the Harshad Mehta-led bull run went bust in early 1992, the drop in the Sensex over a similar 34-day period was lower at 26%. In 1992, the markets continued to drop for another two-and-a-half months, taking the total drop from the highs to 43%.
If that trend was to repeat, the Sensex could retreat to a level of about 7000. Given the fast pace at which the markets have fallen already, it’s not reckless to say that those levels could be reached. But it needs to be noted that unlike in 1992, the bull run this time around was supported by strong earnings growth and better capital efficiency. In many industries, growth continues to be impressive, and it shouldn’t be long before buyers return to the market.
