When Will the Stock Market Recover?

Editor's note: In the last two weeks, the Indian stock market has not shown signs of a sharp recovery. This has caused some concern among investors. Equitymaster's Co-head of research, Rahul Shah, recently shared his thoughts on this. We are publishing his editorial again due to its relevance today. Read on...

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In case you are wondering how much more the broader markets can fall; I have an interesting answer for you.

Well, if the trend in the recent bull market is any indication, then the broader index can fall another 2-3% maximum before it stages a sharp comeback.

You see, the deepest correction in the current bull market has been a mere 7%. Yes, that's right.

Ever since this post-Covid bull market has begun, it has fallen 7% maximum without having any positive day in between. It is also called the maximum drawdown in trading parlance.

Hence, if we go by this trend, we are already down around 5% from the top and hence, have another 2% to go.

Of course, this is a very simplistic analysis, and one cannot take important investment decisions based on the same.

Nevertheless, it tells you how strong the current bull market has been and how bears have been repeatedly thwarted in their attempt to engineer a big crash.

Well, unless there's a big black swan event that catches the market totally unawares, I have a strong feeling this correction isn't going to be a very deep one either.

The reason I feel so is because there is a humungous sum waiting on the sidelines to be invested into stocks. This sum could be as high as 2 lakh crores.

Yes, that's true. If a leading business daily is to be believed, FIIs may have withdrawn Rs 32,000 crores from Dalal Street to invest in China or just to go into risk-off mode following the conflict in the Middle East, they won't be able to pause this bull party for long.

Several HNIs as well as PMS fund managers have been waiting with bags full of cash to buy dips.

Most importantly, mutual funds have close to Rs 1.86 lakh crores worth of cash pile sitting on the sidelines. Apparently, their cash holding as a percentage of their total assets under management was at a 5-year high at the end of August.

Therefore, will this huge cash pile find its way into the stocks now that they have corrected a bit? Or will they wait for the markets to correct more before taking the plunge?

Well, I won't be surprised if they start doing both i.e. start nibbling at stocks and buy more at every meaningful dip. The FOMO seems to be too high at the moment to wait till the markets have fallen significantly. Thus, a recovery could well be on the cards.

You see, my goal over the long term is quite simple. I intend to help my subscribers earn at least 3-5% more than the benchmark index over the long term.

One of the ways in which this can be achieved is by being fearful when the market is greedy and greedy when the market is fearful.

So, is the market fearful enough for me to turn greedy and recommend more stocks?

Well, I don' think so. There is some fear no doubt, but it is not widespread, and it hasn't led to the kind of correction that will make me turn greedy.

On the contrary, as I said earlier, the current fear may not last long and the market may turn greedy again.

In such a scenario, I may have to keep turning more fearful and keep taking money off the table.

Does such an approach guarantee outperformance over the long term?

Well, I think there's no approach that can guarantee an outperformance. However, what I do know is that I am doing the right thing from a long-term perspective.

I am recommending subscribers to buy more at every bottom and sell more at every top. In other words, buy low and sell high.

You'd be surprised how even the smartest of investors end up doing the opposite i.e. buy high and sell low.

They then find it very hard to outperform over the long term. My approach gives me a good shot at outperforming even though it may not guarantee the same.

Well, the purpose to highlight my approach here is to encourage you to stick to your long-term plan and not worry too much about short term market movements.

I believe, if your investing approach is sound, you will certainly end up with good long-term returns.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)