Your Queries on the 8-Year Cycle Answered

Sep 25, 2020

Apurva Sheth, Senior Research Analyst, Fast Profits Report

Over the last few of weeks, we've seen the eight year cycle in Sensex.

I showed you how it affects various sectors as well as stocks within these sectors.

I also shared with you the Maslow's need hierarchy model, which can help you identify companies which could deliver multibagger returns.

Now I promised that I would answer your queries on the 8-year cycle.

In this video, I'll take up the queries that I have received so far. I've also gone through the cycle once again for a quick recap.

Enjoy the video and keep the comments and queries coming in. I love hearing from you.

Hi, I'm Apurva Sheth and I welcome you to this latest edition of Fast Profits Daily. So friends over the last couple of weeks, we've been seeing the eight year cycle in Sensex and how it affects various sectors as well as stocks within these sectors.

Last week, I took a break from the regular eight year cycle videos and I spoke about the small cap space. Actually the small cap space was getting into a frenzy mode after the regulator announced changes to the multi cap schemes, and I believe that small cap space, although it is in a border up trend, on an immediate basis, it looked like a correction or consolidation was in the offing.

Today at 5pm: Get the details of India's #1 defence stock

This week, we have seen that. The small cap space has indeed connected a bit, and they are going into a consolidation. So I hope you benefited from my views. Now, as promised, I'd like to talk about the queries that I have received on the 8-year cycle so far. So in today's video, I will be addressing these queries and I hope that the questions that you may have in mind my get resolved with these queries. So let's get started but before that I'd like to just give a quick recap of what we have covered so far.

 

So as you can see on your screen out here, we have the long term chart of Sensex along with the greed and fear cycles marked in green and red, respectively. So the first greed phase ended the year 1992 with gains of more 469% and here old economy stocks like cement and textiles did well. In the fear phase of 2000, the stocks like telecom media and technology did well. So these are the New Age or the new age stocks or tech stocks that did well.

In the greed phase of 2008 again, the old economy stocks infrastructure, power, realty kind of companies, did well during this phase. In the fear phase of 2016, consumption based stocks did very well and the but the Sensex as you can see, tends to underperform during the fear phase. So here also it generated returns of only 48% over an eight year period.

Now, we are in the greed phase of 2024 and Sensex is up by about 52% so far. So there is still about 3 to 4 years of time left for the greed phase to end and we'll see what kind of stocks do well during this phase.

So, apart from this, I also shared the Maslow's need hierarchy model, which can help you identify multibaggers. So I told you in my video two weeks ago, that companies which cater to basic needs, like food clothing, shelter, etc do well in the greed phase and companies which cater to psychological needs like esteem and belongingness do well in the fear phase.

This is a model that one could use to identify companies which could deliver multibagger returns. So we have covered all these things in a detail in my videos so far. So if you have missed any of these videos, then I recommend you go back and see these videos.

Today we will see of what kind of queries people and I'm sure that many people will have similar queries. So today I'll address those questions. So let's begin with the 1st query which we have got from a viewer called JM 99. Now he writes, Apurva, would you mind sharing such cycles for other sectors as well, like pharma etc.

So I have shared cycles in sectors like auto, metal, IT, and even in SBI, which is a proxy for PSU banks. So I have shared the cycles for various sectors and even stocks. Now you can go back and see the cycles. You will find these articles and videos on our website www.equitymaster.com.

So you can search them in the archives section and you will find it. Now, since you have requested for a cycle in a pharma space, I'll take you through a chart of BSE Healthcare Index where we will see what find of cycle it follows.

 

So here you can see on your screen this is the chart of BSE Healthcare Index. This is a monthly chart and the BSE Healthcare Index goes through a cycle of 36 months or three years. So the cycle ends in the month of April. So as you can see on your screen, the first fear phase ended in April 2003 with returns of minus 7%. Between April 2003 and April 2006, the index moved up by 220%. In the next fear phase, that was from 2006 to 2009, the index dropped by 21% and in the greed phase which followed between 2009 to 2012 the index moved up by 122%.

Now, as for the alternating we have seen so far, the index should have moved into the fear phase and it should have consolidated but what happened between 2012 and 2015, would have surprised anyone. The index moved higher and this uptrend was without any meaningful correction. So, as you can see out here, the index moved up during this phase and this is the place where the greed and fear cycle failed. So that's the reason why I have marked it in blue and this is the point where the cycle has changed a bit.

So from between 2012 and 2015 the pharma index moved up. From 2015 to 2018, the index dropped by about 13%. From April 2018 till April 2021, the pharma index will be in the greed phase and this will be the new greed phase that we are looking at right now. So we have marked this in different colours so that identifying it becomes easy. So now the greed phase will end in the month of April 2021. So there are about six months left for this and we'll see how this pans out. So this is how the healthcare index has moved across greed and fear phases. It is not very clear or should I say it's not as one would have expected it to move, but nonetheless there is some sort of pattern which is visible and one can take advantage of this pattern.

So moving on to the next question, we have it from Sureet Kumar Ghosh and he writes, You have said that the Sensex will start reversing just after US elections. Then how is the greed phase extend till 2024?

Yes, I said that the Sensex could change its trend after the US elections are over. Now there is an interesting cycle which occurs in the US markets that is the presidential cycle and I have recorded a video on this. What happens in the cycle is that in the last two years of the presidency, the economy starts improving, the stock month and starts improving, and that's what we have been seeing so far. Inflation is lower. Employment opportunities are there in the US. So all these things give a feel good factor to the voters and so the incumbent president gets an opportunity to be re-elected. So all these things are so called 'managed' and we are seeing the effects of it.

So once the elections are over, there isn't much of an incentive for the president to keep the markets at elevated levels. Then there are political compulsions which come into play and the markets generally drop lower. So chances are that after fourth of November, global markets may drop lower and even our markets can follow suit. So now whatever correction, if it all may happen, this would be an intermediate correction and this will nowhere have a major impact on the broader or the structural move that we are seeing that is in Sensex. Sensex is already in greed phase and from April 2016 to April 2024, it should normally do well, if things are as per history. So there is a possibility of for correction but this does not mean that greed and fear cycle or the eight years period which Sensex is in right now, will go for a toss. Sensex will would differently recovered after this correction and it should start moving higher.

Now another viewer Mr Gajanan Khadukar writes, I appreciate your analysis of the greed and fear cycles. Please explain the rationale in more depth. Also, can you please explain despite we being in greed phase now, why cement stocks are falling from 2018 or have they bottomed out now?

So I like to thank Mr Khadukar for his appreciation of views that I've shared. Now the rationale I have shared in detail in all my previous videos and even in this video I have shared why greed and fear cycles exist. So now if I say this in short, history may not repeat but it rhymes and there may be different events. So, the market situation in 1992 was a very different from what it was in 2008 or 2016. However, the reaction to these events are normally one and the same. So that's the reason why these greed and fear cycles exist, and that's why there is this repetitive nature that we are seeing in the markets.

Now with respect to cement stocks, as I told you earlier that even as per the Maslow's need Hierarchy theory, normally the human needs although they are basic that is food, clothing, shelter, they remain the same but the way we fulfil these needs are different. So back in 1992 cement was very popular and it was one of the basic needs. India was growing and infrastructure was required. So cement was in demand back then. It is still in in demand but there are other companies in other industries which are taking over. So next the reason why although cement is in a greed phase, it been on not necessarily to do as well as it did earlier in the year 1992.

So now there is another viewer, Mr Shashi, who writes, What if we are going Japan way for a prolonged bear market? There isn't any certainly that we would move up during the 8-year period i.e. till 2024. Our GDP has taken a knock but there is a strong possibility that we will come back and we will start moving higher and if the GDP recovers, if the economy recovers, I see no reason by the market should not recover. So until 2024, chances are that the Sensex could move higher or it would generate better returns. However, after that if we go according to the greed and fear cycle, then for the next eight years, Sensex would be in a consolidation mode and that's when the returns from markets will be subpar.

Finally, there's one question from another viewer, he writes, Kindly recommend books on markets cycles.

So now there are two books that people could refer. That is the Seasonal Stock Market Trends by Jay Kaeppel, and there's one more book by Jeffrey Hirsch. The name is, Little Book of Stock Market Cycles. So these are two books which you can read more about seasonality and cyclicality in the markets. I am sure these two books would help you a lot in identifying cycles and trends and how markets or stocks do repeat their patterns.

So that's all from me for today. I hope you enjoyed watching this video, and in case you did, like it, share it, subscribe to our channel and in case if you have any more questions, then feel free to add them in the comment section below. I'll be happy to answer them. Thanks a lot and have a nice day.

Stay safe and have a great weekend!

Warm regards,


Apurva Sheth
Senior Research Analyst, Fast Profits Report
Equitymaster Agora Research Private Limited (Research Analyst)

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1 Responses to "Your Queries on the 8-Year Cycle Answered"

Gaurang Dalal

Sep 25, 2020

You have not responded to my query sent a few weeks back. According to you, IT is in a fear mode from 2016 to 2024. You even justified the fall in Infosys a few back saying that this was bound to happen as IT was in a fear phase, although the fall was due to the internal problems.
Now that we all are aware that IT is not in fear phase but instead in a greed phase, please let us know the revised fear and greed cycle for IT

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