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Recession often gives way to long bull runs Research Team | Posted On Wednesday, April 08,2009, 05:40 PM

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Recession often gives way to long bull runs



If you have lost a fate in shares, the best method to make it up perhaps is to buy some more. Ever since the great depression of 1929, the world has seen 12 major bearish phases. A typical kind of bear market has lasted for an average of 22 months and seen an average fall of 51%. The index here in the query is the S&P 500.

Bull markets, after each recessionary phase, have always been boon for investors. All major bull rallies ever since end-1930 have resulted in market gains of 50-500%. Historic numbers show that the extent (size or breadth) of a bull market is greater than a bear market. The million dollar question is that are we at the doorstep of another bull market rally?

" Markets could go up irregularly, but convincing rallies will take a lot of time. The current bear phase is totally different from what we have experienced in the past. There are lots and lots of negative factors plaguing various economies. No more than an increase in global demand and depreciating dollar really could do some good for the economy and market,"

As per of the Bloomberg data, if one tries to look at the time period between 1929 and 1953, bear markets prolonged for about 33 months and eroded the S&P 500 index by over 86%; while the alternating bull rallies last for about 268 months logged returns of over 627%. Similarly in 1698, during the days of Penn Central Railroad Bankruptcy, the bear phase had lasted for 11 months and weather-beaten the index by more than 36%. This was followed by solid gains for almost 57% over a time period of 22 months.

In the era of 1973, during the Arab Oil Embargo and Watergate scandal, the market dropped for almost 48% in a short span of 21 months; it, though, recovered thereafter and registered rip-roaring gains of 95% in a span of 70 months. The dotcom bust in early-2000 saw the market trailing about 50%; the resulting bull phase saw the S&P index rising over 97% from its lows. Experts say that there is greater external support for a recovery this time roughly.

Worst stocks become the best.

In accordance to BSE 500 data, which constitutes approximately 90% of the market capitalization on Indian bourses, the best returns came from only those stocks which lost heavily in the preceding 365 days.

Separating all the stocks in the BSE-500 in groups of fifty had observed that the top 50 stocks delivered 52% gains (on an average) in the last 30 days and also boasted of 57% losses in the most recent 365 days the worst returns.

Consequently, a stock like Financial Technologies, which is a part of the top 50 group, not only gained 61% in just 30 days but also has incurred 58% loss in the last one-year period.

This analysis not only holds accurate for the top 50 stocks but little by little for the next 400 stocks: As the normal 30-day gains reduce, thus do the average 365-day losses.

The next second 50 stocks not just recorded 36% gains in the time period of 30-day but also clocked 56% losses in the one-year period. As a result, it is not surprising to observe that the stock of J K Lakshmi Cement which gained 38% in the 30-day period in fact has clocked 55% losses in the preceding 365 days. This will surely continue for third, fourth, fifth and sixth fifty stocks.

Analysts feel that trends like these give you an idea about the divergence that has existed in the stock markets this year. "...the deviation could be a sign that some of the fear gripping investors around the world is narrowing. No longer selling shares accidentally, investors are trying very hard to identify which stocks world-wide will profit if a tentative economic recovery takes hold, even if the economic overview for this year remains gloomy."

The recent past stock market rally which has delivered close to 20% returns in just one month has surprised many market watchers. A quick glance into the stock returns reveals that laggards over the past year giving the best returns.

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