Bear Market Rally or a Bottom?

  • June 16, 2006

After falling 3,682.94 points or a whopping 29.2% from its May 10th peak of 12,612.38, the Bombay Stock Exchange Sensex experienced a strong rally over the last two days bringing the index close to the 10,000 mark. This 955.07 point gain over a two-day period has investors wondering if the BSE Sensex actually reached a bottom on June 14th or if this is one of those notorious bear market rallies. The rapid rise of the Indian market to 12,612 and the 29% correction that followed in little over a month is quite dramatic and such moves would be unimaginable for the Dow Jones Industrial Average. A single 512 point drop in the Dow on August 31, 1998 left investors jittery, bringing back memories of Black Monday or the crash of 1987. Strangely enough I was walking down Wall Street that very same day during my first visit to New York City.

What is even more interesting about this “correction” is the fact that the Indian economy continues to grow strongly and reported a growth rate of 8.1% in 2005-2006, the strongest it has been since 1988. Corporate profits have also kept pace with high double-digit growth over the last few years. While there was a lot of trading by retail investors and high interest from hedge funds and other foreign investors, I do not see any of the speculative excesses we saw during the dot com bubble. Does the strong rally over the last two days herald the end of this severe correction or is it just another bear market rally? I wish I had the power to predict short-term market movements but since I do not come equipped with any such super power, I will continue to watch the market a little longer. If the market breaks through the 10,000 point level and holds above this support level for a few trading sessions, I will start adding to my current positions or buy new Indian stocks.