This Bear Market is Different.

In the good old days, analysts came on CNBC and said “this bull market will last forever, this time it is different”. I was always afraid of this bullish explanation – “it is different.” It never was different – greed was in control everytime there were bull market excesses.

Now, ten weeks into the relentless selling that is going on, I sometimes think – “this bear market is different”.

There are no rallies, no pullbacks, just selling. The Nikkei falls 11% because Sony disappoints. India falls 14% because the Nikkei falls. Europe falls because Asia falls, S&P futures are locked in a limit on Globex, then surprise ! – the Dow and S&P lose just 4% each, while the rest of the world loses 8% to 14%.
On Friday, so called ‘Black Friday’ – I thought, the Nifty is at 2500, very close to a strong support base between 1800 and 2500. On CNBC, I said at 3:15 PM, – “those with spare money not required for next five years may like to invest 5 percent in the market”

First, a word of explanation. I practise very conservative asset allocation. From July 2007 onwards, my allocation for equities was cut slowly till it became 30% of total portfolio. Therefore, I do feel financial pain, but the pain is probably manageable.

Now about this bear market. A 400 point decline (Nifty not Sensex) appears to be ‘irrational pessimism.’ That was my first reaction.

After a restless night, I am not so sure.

What is ‘Deleveraging’ ? How will the world wide credit crisis affect us ? How much impact will a world wide recession have on India ? What happens if ‘hot money’ continues to flee ?

Finally, let us face it, the middle class investor is devastated. Rs 100/- has become Rs 20/-. The first time investor has lost all her capital, therefore, will not re-enter this market for the next five years.

Then, there are fundamental changes in world economic and social order. Nationalisation is again in favor. Croney capitalism (crooked capitalists in alliance with the powerful!) has caused worldwide havoc. How much damage has been done ? Will a repair job swing the other way – too much control ?

Now for the good part. If you note, almost all the issues I have outlined relate to financial engineering. This bull market was created by financials, and, the bear market will see the end of financial services as we know them. That’s fine. Maybe, the economic order is resilent, manufacturing and services are fine, and will grow once the system is purged of these horrible financial wizards.

So, what is the answer ?
Er.. what was the question ?
The Question could be: when will this bear market be over ? The answer should be: The Nifty is now at levels where it will find significant chart support. There is a lot of support between 1800 and 2500. This means that we may be see the end of this leg of the bear market between 1800 and 2500. This process may take its own time, but there will be many opportunities for investors in the near future.