When Shankar Sharma sounded the early warning on 13th March 2013 that a great crash in the stock market was coming, investors ignored him. The result was a deep hole in their portfolios because the Nifty slumped from 5851 on 13.03.2013 to a 52 week low of 5285 on 21.08.2013. The Nifty lost only about 10% but individual stocks got slaughtered with 20% to 40% loss.
After that 52 week low on 21.08.2013, the Nifty surged to an all-time high of 6317 on 3.11.2013.
Now this is where we have to pay attention. The surge from a 52 week low of 5285 to an all-time high of 6317 (20%) has taken place in just ~ 60 days or ~ 45 trading sessions.
In his latest interview to ET, Shankar Sharma has analyzed this phenomenon. Firstly, he claims that when the Nifty touched the bottom in September 2013, he turned bullish and advised his clients to buy stocks, especially banking stocks. He also claims that he had foreseen that the Fed would not taper the QE in Sept 2013 and that there would be a vertical rally. However, this is not documented and so can be dismissed as self-serving.
Secondly, Shankar Sharma points out that the surge in the Indices has been very narrow. While a few big-ticket Index heavyweights have gone up, the rest of the market has not participated to the same extent. “The market is fraught with danger. I have rarely seen a market which is so narrow sustain for very long” he says.
“Its time to take money off the table” Shankar said with conviction in his voice.
There is three-fold logic to Shankar Sharma’s analysis. Firstly, the market has surged heavily in a very short space of time. Secondly, the rally is not broad based across stocks and sectors. Thirdly, the economy is still in a sluggish state with the RBI having reduced its prediction of the GDP growth rate to 4.8% from 6% for FY 2014.
In its latest monetary policy report, the RBI said “The median growth forecast for 2013-14 was revised downwards to 4.8 per cent from 5.7 per cent in the previous round, which is lower than the growth of 5 per cent registered during 2012-13.”
So, it is clear that the macro-economic conditions have deteriorated and there is no justification for being a “table-thumping bull“.
Shankar Sharma also came down heavily on the argument that one should not be bearish on equities when liquidity was a high.
“I never buy any of this liquidity nonsense” he thundered. “By that token the markets should never have ever come down because the FED has always had an easy monetary policy to benefit Wall Street and Main Street”. “These are self-serving arguments spun out by people trying to protect their jobs” he said. “There is no co-relation between liquidity and the markets” he added.
Anyway, now the question is what you will do about this analysis. Will you ignore it or take proactive steps?
Speaking for myself, I am convinced that this vertical rally has to give way sooner or later. So, I am going to take advantage of this rally to get rid of all the junkyard stocks in my portfolio (I know I should have done this earlier). I’ll keep the money ready for deployment into my top-20 dream stocks as and when the slump happens.