»Profit Hunter by Equitymaster

On This Day - 1 SEPTEMBER 2021
Is a 10% Nifty Crash Coming?

Rahul Shah, Editor, Profit Hunter

One of the main stories on Bloomberg Quint on Monday was of a possible 10% fall in the Nifty.

A leading brokerage house argued that we are in the 74th week of the current rally and are about to cross an important threshold.

'It has been observed historically that once the market rallies over 75 weeks, generally the momentum weakens', argues the brokerage house.

'Obviously that's not a fundamental analysis, but this is what the trend suggests from the past cycles as well. For the headline index Nifty 50, our target is 15,000 for the year end, implying about 10% downside from where we are', concludes the analysis.

Well, despite being a fundamental analyst, I have nothing against the technical or rather, the momentum analysis put out by the brokerage house.

In fact, I myself believe in momentum being one of the biggest anomalies in the market alongside value.


However, I do have a bone to pick with the preciseness of the forecast.

I may accept that momentum is weakening and there is a possibility of the market going down rather than up, over the next few months.

However, to predict that it will crack 10% and to give an exact target for the Nifty just four months down the line is what gets my goat.

Ben Graham once famously observed that in the short term, the market is a voting machine and in the long term, it is a weighing machine.

Put differently, over a short-term period, stock prices are dictated mostly by sentiments and emotions.

Thus, to make an exact prediction over this time period is like trying to measure people's sentiments and emotions. This is an impossible task in my view.

I am fine with making a stock market forecast.

But it should be approximate and not precise. And this applies to all time periods i.e. short term as well as long term.


Therefore, if Bloomberg Quint were to approach me and ask for my take on the market, here's what my reply would have looked like.

  • You see, back in March 2020, the Sensex TTM PE (trailing twelve month PE ratio) was comfortably below its long-term average of around 20x. Thus, it was a good time to be in stocks to the tune of 70%-75% of your portfolio.

    As of now, the ratio is close to 30x and well above the danger mark of 25x. Thus, it is a good time to pare exposure to stocks and bring it down to say 50% of the portfolio or may be even 25%, if you are expecting a big crash over the next 12-15 months.

So, there it is.

A prediction that's not precise but still allows you to do the right thing from a long-term perspective.

Take more exposure to stocks after the market has gone down and reduce exposure after it has gone up.

You see, most investors end up doing the opposite i.e. buy high and sell low.

Of course, it can be argued, why not be 100% in stocks all the time since markets have always done well over the long term?


I don't disagree with this approach. But if you do this, you will most likely get market like returns over the long term.

If you want to beat the crowd, you have to do things differently than the crowd. One of the best ways of doing this is to keep toggling between stocks and bonds based on the broader market valuation.

The downside with this approach is that it can lead to massive underperformance in the short run if markets keeps going up.

In the stock market though, you cannot have your cake and eat it too.

You will either end up having market like returns over the long term by being 100% invested or you can try to outperform.

If you want to outperform the market, you must be ready to accept some underperformance if things don't work out as per your plan.

The choice is entirely yours. So, going back to the 10% correction argument, I wouldn't worry about it too much.

I have my own process of investing in the stock market which I just shared above and I will stick to that.

What do you think about my investing process. You can let me know by writing to me here.

Warm regards,

Rahul Shah
Rahul Shah
Editor and Research Analyst, Profit Hunter

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