The Chakravyuh of Bear Market

The Indian stock market has been in limelight for almost 5 years since the bulls in 2004 swayed every investor off his feet; and the rally continued until January 2008 when the steep fall in index acquainted people with the real risk in stock market.
I am often bewildered with the in depth knowledge people have about the market and the conviction with which they can predict the market trend, the support and resistance levels exhibiting such an expertise that even qualified analysts would shy away.
On every occasion one’s predictions come true the investor pundit would hold his head high during the next social meet (typically on morning walk) and make it a point to remark that his speculations are always right, and bombard new investment fundas at the herd of people gloating to his inflated ego.
The failure of the market to meet the prophecy of our pundits is attributed to the evils of FII who probably lure behind the “Bush” eavesdropping to conspire against the generous motives of our market gurus.

Anywayz lets try to evaluate why it is so tough to overcome the blues of the bear market.
Keeping the idea simple I am sure we are all acquainted with supply and demand rules. All the while during 2007 end and starting of 2008 correction was expected because the stocks were overpriced.
Finally the Financial institutes started to book profits selling their stocks. Watching the trend the retailers joined the force with the intention to repurchase the stock at a discount of 20-30%. A correction of 20-30 % is huge but in comparison to 100 to 200% gain in stock prices over a time span of just one year it was diminutive.
It is important to understand that a crucial role is played by the open interest position built up by the futures and options influencing the market trends. An expectation of fall in price is an opportunity to make money by short selling. Short selling is time bound. Generally the positions are squared off on last Thursday of every month. FII and other institutions would indulge in short selling to make quick profits. The huge volumes in short selling of stocks forces the prices to dip further down.
HOW?? Well the supply (sell) is more and than demand (purchase). This would force the price to a new equilibrium which is lower than the current price.
The continuous beating which the market has endured has diminished the enthusiasm of the most optimistic investors too. This has resulted in the sentiment of recovering the investment and avoid further capital erosion.
Say on the occasion of the first correction in January 2008, investors were lured by the temptation to acquire their favorite stock at a discount of 20-30 %. So there were investors who entered at the level when nifty was 5200. After a short while nifty reached 4600. Investors who believed that this was a strong support and there is no real reason for the market to further plummet down entered at these levels. Soon we saw 4400 then 4200 and then 3800. Assuming there was some inflow (buying) at these levels because these were strong support levels for nifty some investors had bet in their money expecting the market to reverse from these levels and reach the January highs again.

The wounded sentiments of our optimistic soldiers, patriots of the bull run, are worried to recover the capital which has eroded over 50% in a period of eight months since January 2008.
So, every time the market would rise to the level where the investors see a breakeven on the horizon, they would sell their stakes to recover back their capital. This selling force generally overcomes the recovering market and pushes it back further down. The selling(supply) is more than the buying(demand) and the price would have to again go down to lower equilibrium price.
The wounded bull staggering at a slow pace yields to the enormous force of the bear falling down further with a great thud, generating wave of panic among the patrons who see their hero falling to taste the dust again.

It’s a vicious circle and we probably require the might of Acharya Drona to break the Chakravyuh.
Primarily the wild selling force has to be tamed to stop creating impediment in the path of recovery. Short selling has to be regulated and stopped on particular occasions or on particular stocks to avoid unnatural built up of selling position. The futures and options market would have to undergo similar changes to avoid undesirable open interest position built up.
The sentiment of the investors needs continuous consoling to prevent selling at every attempt of the market to recover. It is almost like on every occasion the wound is getting healed a fresh infliction is induced, defying all the attempts of recovery.

Once the selling force is restrained, and any chances of further infliction is minimized it is time for fresh investments. Its like new blood will flow in the veins of the bull giving impetus to rally ahead again.

Though sounds pretty convincing, it is an enormously daunting task to accomplish. But if we want our bulls to mull again out of the ‘Chakravyuh’ these steps are indispensable.