Sensex chart since 1979
Below are some interesting charts of the Sensex (Indian Stock Market Index) from 1979 to 2013 (August).
Note – All charts are on a semi-log scale
Some interesting observations
1) All major bull markets are followed by either bear markets or sideways markets.
2) If a prior bull market lasts a year, then the subsequent bear or sideways market lasts a couple of years or so.
3) If the prior bull market is prolonged and lasts 4-5 years with the index multiplying multi fold (a Super cycle Bull Market), then it is always followed immediately by a severe bear market crash (a Super cycle Bear Market). The bear market crash is followed by a multi year sideways market (Super cycle sideways market).
4) Fundamentally, one can correlate this chart with another chart I posted. Bull markets historically are almost always born out of extreme pessimism, undervaluation (P/E of 10-12) and a general lack of interest in stocks by the public and the investment community in general.
5) Bull markets end in euphoric optimism, extreme overvaluation (P/E of 26 or more) and a lot of interest by the general public.
6) Bear markets always begin in doubt but end in severe panic scenario and the stocks become very much undervalued. (P/E of 10-12).
Conclusion
Being informed of these cycles is very important and useful as an investor or a trader.
If one doesn’t have a lot of time to track the markets, they could just consider buying stocks when the P/E ratio of the index is in undervalued territory (around 10+/- 2) and selling when they are in over valued territory (around 26 +/- 2)
To know more about P/E ratios, click here
Going by the past history, we seem to be in a prolonged phase of a super cycle sideways market from around the middle of 2009.
If one believes history as a guide of what is to come, one could expect a bull run in the future to succeed this boring phase that we are in right now.
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