Wednesday, November 27, 2013

How long do cycles last ?

How long do cycles last? Sensex, Nifty

Plenty of research has been done on the cycles in the stock market in the US to gauge the time taken by each of these cycles, which can be used in investment decisions. Such studies are easier in the US where stock market data is available for over 100 years. But the oldest stock market index in India, Sensex, has data available only from 1979. This limits the utility of cycle analysis in India.
However, we analysed the Sensex monthly data since its inception to gauge the time taken by bull, bear and consolidation phases by our market. Here’s what we found.
Secular trends in stock markets are the long-term trends extending beyond 10 years. The Sensex has displayed a rising secular trend from 1979. Each correction within this trend has been followed by a higher peak, establishing a positive long-term trend. Within this secular trend, there are cyclical bull markets, bear markets and consolidation phases that have lasted anywhere between a few months to a few years.


We narrowed the definition of a cyclical bull market to those market phases that have resulted in the Sensex gaining almost 100 per cent without any significant correction. We have seen nine such phases since 1979. The gains in these phases have ranged from 96 per cent to 622 per cent and the time taken has varied from 8 to 56 months. It was, of course, the bull market between 2003 and 2008 that gave the largest gains and lasted the longest. There were corrections within this phase that were very short in magnitude or time taken to qualify as bear phases. If the 2003-08 bull market is excluded, these rallies have averaged a return of 160 per cent in 15 months.


We have defined a cyclical bear market as one where the Sensex lost more than 40 per cent. There have been five instances since 1979 when the Sensex has fallen in this pattern. We have classified the correction between 1994 and 1998 as sideways correction since it lasted for an inordinately long period with a range-bound movement. The average decline in these falls has been 51 per cent with the maximum decline at 62 per cent in 2008. The fact that we have not had a decline greater than 62 per cent helps to underline the fact that our equity market is in a secular bull phase.
The time taken by these bear phases has at most times been equal to the bull phase, at about 14 months.


Sideways moves can appear in both a secular bull and a bear market. When the reversal results in limited price correction, but lasts for an extended period, it results in a sideways moving market.
These kinds of moves are also common both when the market is building a base from which to launch the next upmove; and when it hovers for long near a peak before giving way. These are the most exasperating periods when prices fluctuate in both directions with no headway made either up or down. Investors often resort to sector rotation during these periods. There were three such phases prior to the 1990s, resulting in index movement of between +4 per cent and -15 per cent.
The average time taken by each of these phases was 21 months. One extended sideways correction that many old-timers in the market would remember is the one between September 1994 and November 1998.
This was the longest sideways phase lasting a protracted 50 months. But then the market needed this time to adjust to the wild excesses of the Harshad Mehta-led bull market in 1994 and the IPO frenzy in early 1994.


Our market too has an election cycle similar to the Presidential cycle in the US. According to this cycle, stocks tend to rally during the first two years of rule when a stable government is formed at the centre. Coalition governments result in sub-par stock returns in the election year. There are also some months which are better for stock investors. Since 1979, Sensex has recorded the maximum positive closes in December. October and March are the worst months for stocks according to this metric.

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