Hunt For The Bottom-Are We Near?

The ‘BOTTOM’ is an important landmark in a downward stock market. In the current period it is a commodity as sought after as hope or confidence. It is important because it indicates the lowest point that a stock market‘s index will hit. Once a bottom is reached there is no way but up for the index which also means that if you invest at the bottom, your money will have no way to go but up. The benchmark Sensex of the Indian stock market breached the 10,000 level and closed at the 9000 level for the first time in two years today. While it is still difficult to say if we’ve hit the bottom, we can surely say we’re somewhere close to it.

For long market analysts have anticipated the bottom. In the period leading up to the US passing the 700 Billion Dollar bailout plan, the Sensex tumbled steadily touching new lows everyday. Some anticipated this as the bottom. There was the period of time after the initial euphoria of the passage of the bailout plan when the Sensex once again tumbled. This was once again the time analysts predicted as the bottom.

During the past few days the Sensex has been hovering dangerously close towards breaking the 10,000 barrier, once again analysts have predicted this period as one where the bottom will emerge. So finally when today the Sensex broke through the 10,000 barrier despite the loss in market value and a 600 point hammering; traders for the first time in a long time got a whiff of the sense that we are finally somewhere near the market bottom.

This is crucial because it brings in a degree of certainty. Every day the Sensex has seen amazing amounts of volatility. People rush in to buy whenever share prices drop dramatically. The result is a rally which automatically pushes the Sensex up thus attracting the notice of the sellers who want to sell at high levels. Such a phenomenon happened today as well when there was a brief rally that finally led to a multi point sell off.

What traders most obviously don’t want to see is a fear grip taking over, at least not more than what has happened. This will lead to the creation of an ‘irrational bottom’ when the Sensex will plummet to levels that it realistically does not deserve. Panic is being displayed in large amounts by FII’s (Foreign Institutional Investors) who hold huge stakes in Indian companies. Whenever they sell their stakes across the board, the Sensex tanks big time.

Many are doing this because they don’t trust the market to give them the sort of returns they want and it is not foolhardy to think so. The problem starts when they sell too much creating panic even in local traders who also start selling in order to cut their losses.

Perhaps the solution to this problem can be analyzed with the illustration of a person with a big wound. In order to clean the infection the wound needs to bleed. If it bleeds in phases then the wound appears healthy one day and sick the next. The only way we truly know that an infection is gone is if the wound is allowed to bleed profusely and completely in one massive swoop.

Similarly, the Sensex needs to fall in one large drop. That will finally indicate the emergence of a bottom.