The correction in January has been sharp, swift, and sudden. Few investors anticipated this would play out as it did. More relevantly, nobody is sure how deep the correction can be and how long it will extend. Clearly, investors are not sure about how to play this dip.
The dilemma is whether to buy this dip or not. Earlier dips were swiftly bought into and the markets rallied thereafter. But, the fear now is that “this time is different”. Earlier dips instilled enormous confidence to buy every dip, without providing time to test the market’s strength against the intensity of the dip. We never stress-tested the market in previous dips to assess the power of the downside move. Instead, we rushed in to support the markets and arrest the downside momentum.
This worked very well for a few years and our market rallied with more strength after every dip. This time, the contraction in valuations seems broad-based and across categories. The market is showing no consideration for underperformance. It is brutally punishing the laggards shelling out bad news. Stock prices of several companies have significantly fallen from their 52-week highs and the weakness is spreading very fast. The broader market trend is turning swiftly, and the near-term downward momentum seems irreversible. Market breadth is turning more negative with each passing day and this seems to be happening on thin volumes. If selling volumes rise further even after a significant decline, it would only weaken the market and make technicals look extremely vulnerable.
The coming weeks are critical to judge the response of the market and to evaluate the strength of the reversal from the new lows. The broader sentiment increasingly looks weakened. It remains to be seen if we can quickly overcome the prevailing negativity, or if we need to wait for extended time periods to see a strong trend reversal.