Thread by @swing_ka_sultan

Shared some #SituationalAwareness notes today morning in Mentorship group -

Situational Awareness (notes 1 July, 2022) -

Long Term View -

1) Long term view is bearish. Do not expect a bull market anytime soon. These are the magnitude of past bear markets on the (1/n)

small cap index (all calculations are done from peak to trough) -

a) 2008-09 - (-78%) in 60 weeks (roughly 15 months)
b) 2010-13 - (-46%) in 146 weeks (roughly 2 year and 3 months)
c) 2015-16 - (-31%) in 43 weeks (roughly 9 months)

(2/n)

d) 2018-19 (excluding Covid Crash) - 47% in 83 weeks (roughly 1 year and 7 months)
e) 2018-20 (including Covid Crash) - 67% in 114 weeks (roughly 2 years and 3 months)
f) Current - 34% in 22 weeks (roughly 5 months)

These stats tells us about the duration and magnitude of (3/n)

the bear markets we had seen in last 2 decades. There had been some brief drops, but they weren't full fledge bear markets. Among above the most severe ones were the crashes we saw in 2008-09 and 2018-20 while the most brief one was in 2015-16. It is important to note that (4/n)

in 2015 we weren't coming out of a multi year bull run, and before the peak in small cap index, we were already in a consolidation from 44 weeks, which is appox. 10 months.

If we compare current crash, in duration, it is the way away even from the shortest bear market of (5/n)

2015-16. But the actual market topped out in Oct 2021, before the peak in small cap index. It has been 35 weeks since then. Among the past bear markets, 2008-09 and 2018-20 came after a good sized advance which is comparable to the advance we had in 2020-21. Bear market (6/n)

which followed these advance last for more than a year in duration, while being very harsh in terms of price correction. Hence it is safe the say that at the very best, we are somewhere mid way in duration.

In terms of magnitude of the fall, we had corrected very sharply (7/n)

in 22 weeks. It is important to note than both 2008-09 and 2018-20 bear markets included the impact of one time event such as Subprime crisis and Covid Crash. Looking at the stats, it seems like around 50% correction in small caps is a reasonable level of correction we see (8/n)

in bear markets.

Currently we are 34% off from highs in comparatively short duration. Hence there are 3 scenarios we can assume in this circumstance -

a) More price correction in less duration, afterwards a bull market begins
b) Time correction after price correction (9/n)

(till now price is falling more in less duration, going forward it will fall less in more time and becomes choppy)
c) A rally upward before the next legs of decline

Scenario a looks the most optimistic but is the least probable while b and c suggests a lot of pain is yet (10/n)

to come. The probability of c is the highest among all 3 scenarios, but we often tend the discard the probability of a time correction.

Conclusion - Bear market is here to stay for quite some time. Do not hurry in assuming that the market is bottomed out even if we get (11/n)

a rally, because due to the severity of fall, a rally is expect and most probable. In case of a rally, we should be cautious for the resumption of the bear market. A common mistake most people do in earlier legs of the bear market is to quickly assume that a new bull (12/n)

market has begun.

Short term scenario -

Market had been pretty bearish in past few days and a bear market rally was expected. We also got a rally attempt followed by follow through buying in sync with this view. But the way market is spending time without going up past (13/n)

that follow through, it is concerning, suggesting bulls are pretty reluctant despite market being in somewhat an oversold territory where a reversal was looking imminent. This reluctance from bulls is a pretty bad sign, providing green signal for bears to continue there (14/n)

dominance for some more time.

How to trade in current situation -

Longs are not favored, breakouts are failing even from good bases. Velocity trades are reversing while being way off there targets. Taking fresh shorts are also not looking very good as the market is (15/n)

somewhat is oversold area.

Lower your targets and become proactive in trailing your SL to BE in any strategy you are using, if it is a long trade. Avoid Magnitude trades. Reversals are the only viable strategy to trade now. Prefer buying tightening in a stage 1 kind of (16/n)

formation, after correction than buying breakouts in stocks which are still around highs.

Long term strategy for the bear market -

Observe the behavior of stocks which had fallen most or the least. Those which fall most in the first or second leg of the bear market (17/n)

carve their stage 1 during the 3rd leg of correction as they offer more value than others at this point of time. They will be the first to bottom out. For example, study the stage 1 formed in Dixon in 2019 and compare it to the market's actions in same period. Use NSE (18/n)

Universe list and the New Listings list to identify such candidates.

There will be very few stocks which will fall less in bear market and will resume their move in the new bull market whenever it comes. These will be backed by a strong story or theme. Maintain a separate (19/n)

list of these stocks and try to identify the story behind them.

Today's Strategy -

Not becoming aggressive. There is quite a lack of clarity about how the day will pan out. Expecting another muted or mildly bearish day. (20/20)