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Are we heading for a bear market in equities? This question needs to be answered and the issue should be seriously mulled over. We are at the crossroads and the soon the tables may turn to favor the bears unless something extraordinarily positive happens equally soon enough.

First, to recollect the day gone by: a bitter pill but we do have to swallow it in any case. The Nifty, in all likelihood, broke the 200-day Simple Moving Average at 4989.45. and the FIIs are selling all over the place. The world scenario turns murkier with hardly any significant resolution in sight. Option transactions went through the roof (it went by nearly Rs 32 billion while that for futures went up by a meager Rs 2.86 billion), definitely not a good indication for options transactions tend to increase in a big way when downside pressure start mounting. The Nifty Vix shot up to 32 another indication of high degree of skepticism. The FIIs sold $300 mn in Cash, $340 mn on Index Futures and simultaneously bought $580 mn on Index Options; an expression of utter lack of confidence!

The international cues have shown hardly any improvement: the US indices fell though not much, Gold has shown marginal rise by $3 to $1196 as we write this Market Outlook. However, Asia is on a recovery path led by Hong Kong that market is up by 0.6% just after opening. Our man, the SGX May Nifty is trading at 4930, up by 5.50 points, on good volumes. So far so good!

To put things in perspective we need to see one crucial point: The upswings in the bull trend that began early March last year is getting shorter in amplitude in both time and price terms. The first two intermediate upswings had been of 14-weeks duration and the first one was more than 2150 points and the second one was above 1250 points. The third intermediate upswing from Nov 03 lasted for 9 weeks and was of 772 points and the recent most upswing lasted for 59 calendar days and the price amplitude was of 724.25 points to be precise. Definitely, not a sign of strength—it is actually an indication of loss of momentum.

Now, look at the corrective downswings in between: the first one the June-July downswing after election results lasted for 32 calendar days and 774.45 points; the second one from Oct 20 till Nov 03 last year was for 643.45 points. The third one from Jan 06 lasted for 34 days and 635.45 points. The last one starting from April 07 is still counting and has already shaved off 491.50 points. What is of great importance is the fact that the downswing has already lasted for 43 calendar days, the longest among the four intermediate downswings.

Price amplitude so far may be less but time duration increasing by a significant manner should not be ignored. This is because price can spike at any time give a large amplitude while time count goes by 1 point in a day nothing more nothing less. To keep it in a down for longer duration in any counter swing signals a probable change in trend. If you want to see how the reverse of what is happening now gave an early indication of the ensuing change in trend between Oct 27, 2008 and Mar 06, 2009, a study of the swing duration and amplitude would tell you the efficacy of the principle and its underlying belief that if a trend has to continue it should last longer and price amplitude should be greater but time coordinate gets a priority over price.

Our understanding is that the bear market that began with the subprime crisis taking deep roots in 2008 has been followed by a corrective upswing that came alongside a massive injection of monetary liquidity. This corrective upswing is now culminating with another debt crisis: the sovereign debt problem in Europe. Probably, the larger bear market that began in 2008 would end with US debt problem blowing in full magnitude sometime in the future. We, for one, do not understand how Spain whose debt is only 59.6 cents to the dollar is worse than the US whose debt is 94.6 cents to the dollar. The richest nation has $12.7 trillion internal debt and is still counting. Its deficit is 10.6% compared to Greece’s 12.6%. Spain’s is lower at below 10.

The point is Greece can, probably be saved by European Union and the IMF. When smaller countries need money they go to the IMF and the IMF looks to Washington for majority of its funding. However, who would chip in when the US would need it badly. Perhaps, this could be one of the reasons for venerable Richard Russell to send to his clients an unusually apocalyptic message: "Do your friends a favor. Tell them to 'batten down the hatches' because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country (the USA)."

The very successful commentator Dan Sullivan has also joined the ranks of Richard Russell by going 100% cash.

Now, what should we do? India may be much better off economically and at some point of time there might be decoupling from the West but as of now we are sure to suffer collateral damage since one large set of market participants (the FIIs) are there in all the markets. It would be quite a while when India would be able to establish the fact that it can grow at a faster clip even when the West and other parts of the world are slowing down and/or stagnating. Only then expect a full decoupling; as of now, the people who matter would be more skeptical of any such prognosis and/or anticipation. The resultant effect is that your and my belief in India notwithstanding our equity market would also suffer along with others may be to a lesser degree but suffer significantly it will for sure.

Thus, use any rally henceforth to liquidate or at least lighten up your portfolio holdings.

For the day, the Nifty support levels are located right 4886 starting from 4917. It could be that if Asia were to continue showing some recovery even we would scale up in short covering. However, the range between 4970 and 4997 would bring in supply pressure and above that 5020 - 5030 should be watched for another dose of supply overhang. Unless the Nifty clears 5125 do not expect any sustainable recovery.

On the downside below 4886, the support levels are at 4839, 4827 and at 4780.

Rajat K. Bose