Pithaly

We had expected the four-year long bull-phase to terminate in the first quarter of 2008 in our long-term outlook at the beginning of this year.

Our outermost target for the Sensex for 2008 was at 13700. Now that this level has been conclusively breached, a review of the long-term counts is called for.

The signs of a significant bull-market top were littered all over in the last quarter of 2007 – irrational price movement, excessive speculation, unjustifiable valuations, bottom-rung stocks coming out of wilderness to enjoy their days in the sun, surfeit of exorbitantly priced IPOs and so on. The party had to come to an end and it did at the peak at 21206 on January 11.

As explained in our yearly outlook, it is possible to anticipate a correction but difficult to judge the nature of the correction. We had taken the more optimistic view at the beginning of this year and anticipated the corrective move to halt at the first long-term support at 13700.

A halt here would have implied a sideways move between 13700 and 21000 for a couple of years before the up-trend resumed to take the Sensex beyond 30K.

But the decline below 13700 brings the next long-term supports for the Sensex at 11900 (50 per cent retracement of the up-move from 2001) and then 9703 (61.8 per cent retracement) in to focus.

We stay with our long-term count that the current down-move is the fourth part of the long-term cycle that began in 1980.

The fifth leg (upward) would then take the index beyond 25000 again. Caveat - decline below 9703 would need recasting of the counts.

The more difficult question is, how long would this down-trend last? As per Elliott Wave theory, corrections can extend from anywhere between 0.33 to 1.618 times the time consumed by the previous up-move.

The previous up-move lasted four years. That gives us the range between 16 to 77 months. Since the previous long-term correction from 1994 to 2003 was a long-drawn one, applying rules of alteration, the correction this time can be a sharp and swift one that ends in one to one- and- a- half years.
Second half of 2008

Though the Sensex appears to be hurtling lower in to an abyss right now, a three wave A-B-C movement downwards is drawing close to termination. A 1:1 relation between the A wave and the C wave gives us the target at 11206. Fifty per cent retracement of the bull market from 2001 gives us the support at 11900. The decline from January can halt somewhere between these two levels.

However, it needs to be borne in mind that the down-move from 21206 could be the first leg of the long-term correction. But once this leg ends, we would have an intermediate term up-trend that would provide some respite to the battered stocks.

The preferred view is that the index would halt in the zone between 11000 and 12000 and spend the rest of 2008 in a range between 12000 and 16500. Our outer targets for the year would be 18000 and 9700. We await clues from subsequent rallies to tell us how the rest of this correction will shape-up.

— Lokeshwarri S.K.

http://www.thehindubusinessline.com/iw/2008/07/06/stories/2008070650230900.htm


From a fundamental perspective, the collapse in the Sensex PE multiple, from 29 times trailing earnings in January to about 16 times now, ensures that rosy growth projections are no longer factored into Indian stock prices.