It's worse than a bear market

Last week we wondered whether we were in a bear market. Now I don't think there is any need to find answers for that question.

Not that the street has reached a firm conclusion, but the kind of drubbing that stocks have seen in the last fortnight, the losses are almost equal to what one can have in a sustained bear market.

Hectic investors' counselling at the beginning of the week brought home the extent of the loss suffered in this January-February slide. That made us go back to our desks and compare the dents received during this period to a full-fledged bear market from February 14, 2000 to September 28, 2001.

On February 14, 2000, our Sensex made a new high of 6,151 and the markets tanked thereafter. The bottom was formed by the Sensex on September 21, 2001 at 2,594. The Sensex fell 3,340 points or 54.3 per cent in the 19.5 months of the bear market.

To gauge the damage done in the recent drubbing, we looked at the highs made in December-January, and compared them to the lows between January 22-February 14.

The Sensex tumbled 27.7 per cent from the high of 21,207 on January 8 and the low of 15,332 seen on January 22. This compares favourably with the 2000-2001 data where the Sensex fell 54 per cent over a 19-month period.

But when we looked at stocks that fell more than 40 per cent, we were amazed to find that 79.27 per cent of the 2,764 stocks traded had lost more than 40 per cent of their value in this brief period. This was much more than the 69.09 per cent of stocks that lost as much value over 19 months in 2000-2001.

The losses from the recent drubbing have been more brutal. It goes without saying that the perpetrators of this menace of shorting would have made more money than has ever been made in this market ever.

Another observation -- while the Sensex and most derivative stocks made their lows on January 22, the day the markets hit the lower circuit breaker, only one Sensex stock and 9 per cent of derivative stocks made a low after January 22.

Here is an astonishing fact. More than 71 per cent of the 2,764-odd stocks traded on the BSE went below their January 22 low this week. That is almost 77 per cent of the stocks traded in the cash segment.

How did it happen? Well, derivative stocks can fall as much as they want on any given day as long as the Sensex does not hit the circuit breaker. So most of the venom was out of the system on January 22 and whatever residue was left was pumped out on January 28, when the January derivatives expired.

The movement of stocks in the cash market, however, is subject to their daily circuits, which is 5 per cent for most stocks. Initially, all stocks were on the lower freeze, so leveraged positions could not be cut.

Only when buying emerged in the frontline stocks that leveraged positions in the cash market began to be cleared. Another bout of weakness in the broader market on Monday last pushed the cash stocks into another round of lower circuits, effectively draining the last bit of the risk appetite of the investor.

Now, whether the analysts on Dalal Street agree or not that it is a bear market, is immaterial. The damage has been done.

May the small investor rest in peace.