How Soon Before the Market Reaches New Heights Again? - Profit Hunter by Equitymaster
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How Soon Before the Market Reaches New Heights Again?

Feb 6, 2019

Richa Agarwal, Research analyst

Just yesterday I wrote to you about why retail investors don't buy more during crashes even though corrections offer a chance to pick quality small caps at the price of pennies.

The answer, I wrote, lay in widespread fear and the inability to see beyond the price charts.

In the depths of a market crash, it is impossible to predict when the next upcycle will start or how long a downcycle will continue.

Be that as it may, every once in a while, there comes along a set of numbers that gets one totally thrilled.

The kind that gets you up from your seat, pacing the room, amazed at what goes on in the circus of the stock market.

I stumbled upon such a statistic recently. In researching stock prices going back to 1985 and all the market crashes since then, guess what I discovered?

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Over the last three decades or so, on average it has taken only 1.8 years to go from the dreadful depths of a stock market crash to the lofty pinnacle of a market high!

Do note that this is not the time taken only to get out of a crash. This is actually the average time it has taken to get from the depths of a market crash to the next market high.

And wait till you hear this next bit...

The BSE Sensex's average gain during such periods was 165%!

That's more than two and a half times your money in less than two years!

Talk about gain after the pain!

Here's the entire story:

Date when market
hit a high
Time taken to swing from depths of
previous crash to the high (years)
Gain in the Sensex
27-Feb-86 1.2 143%
09-Oct-90 2.5 300%
22-Apr-92 1.2 367%
16-Sep-94 1.4 127%
05-Aug-97 1.5 61%
11-Feb-00 1.3 115%
14-Jan-04 2.3 138%
10-May-06 2.0 180%
08-Jan-08 1.6 134%
05-Nov-10 1.7 157%
29-Jan-15 3.1 96%
Average 1.8 165%

Now that's an exciting statistic!

It gets even more exciting though...

Small caps, notorious for volatility, tend to see exaggerated price moves on both the upside and the downside.

What this means is that their moves form market crash to market high tend to be even more dramatic!

While data for the BSE Small Cap index is not available for such a long period as the Sensex, this is more than evident from even a cursory look at comparable numbers for the Small Cap index.

For example, as you can see in the table above, the gain in the BSE Sensex when it swung from the depths of the previous crash to its high in Nov 2010 over a span of 1 year and 8 months was 157%.

What was the gain in the BSE Small Cap Index over this same period?

A massive 254%.

Here's the thing. Falling stock prices are usually an equity investor's biggest source of pain.

And a market crash?

Well, that can cause outright depression. It can paralyze existing investors and scare away new ones.

But down in the depths of a stock market crash like the one we're in currently, when fear rules and everywhere you look is red, remember these numbers.

And the power of small caps to make money through this volatility!

Regards,

Richa Agarwal
Richa Agarwal (Research Analyst)
Editor, Hidden Treasure

PS: 4 small caps stocks that Richa has identified are going to soar from their current cheap prices to new highs very soon - these 4 rebound stocks could change your fortunes - if you get in now.

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2 Responses to "How Soon Before the Market Reaches New Heights Again?"

P S Rao

Feb 10, 2019

Constituents of sensex go on changing. So calculations based on sensex give wrong picture.
Currently there is no market crash. There is only midcap small cap and microcap crash. Please calculate erosion in top 100 versus rest.

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BISWANATH DEY

Feb 6, 2019

That is small cap index that has given tremendous return. The question is whether individual small cap has given such result.Even if it has given whether retail has boght those stocks. After giving return it is easier to say that had u bought this u would have got 2000% return.

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