In my last Mojo Talk,  I had written about the Four phases of a Bull market. The idea was based on the famous quote by Sir John Templeton: “Bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria.”  Thank you all for an overwhelming response on your thoughts on where we are in the Current Bull Market.

Before I put my thoughts, let me summarise the Audience Poll (using the KBC jargon):

I believe that the current phase began just prior to the General Elections 2014.  All the classic signs of optimism phase are evident as the phase has matured.  The exception was the hiccup that happened due to Demonetisation, but the way the markets bounced back, shows the strength of the optimism phase. So what were the signs?

As seen from the table above:

• Broad basing has happened. The small caps have outperformed the midcaps which have outperformed the large caps. If we had a micro-cap Index this would have shown them outperforming everything else.
• Technicals in general have worked very well. Buy on dips have worked very well as a strategy.
• Stocks with earnings momentum are doing extremely well irrespective of valuations.
• Earnings based valuations have become high and analysts are justifying prices based on 2020 earnings or Sum of parts valuation.
• As is typical with the maturing of this phase, holding companies discounts have started shrinking and thus have started doing better than what they hold as people try to find cheaper options. Case in Point is the performance of Bombay Burmah which is a holding company for Brittania is up 202% last year versus Britannia’s 63% return.

Based on the above it is not difficult to establish that we have been in Optimism phase for a while, the question is are we in Euphoria stage yet?

We have started seeing early signs of Euphoria in some cases

• The NSE Emerge exchange has garnered a lot of interest these days. While the companies may be goo the fact that the disclosure norms for these companies are not great make them more risky. The NSE Emerge Index is up 34% since October 2017 against a 10% move by the BSE Small Cap Index. The fact that I get a lot of tips in these SME stocks is also telling.
• We categorize company which are not making profit as risky. As a whle this group of companies have gone up 21% in the last 3 months.

But there is good news

• Thankfully these cases of Euphoria are currently limited to small pockets. The annual returns of the large caps over last 4 years, of 13% is same as the long-term trend – hardly a sign of Euphoria.
• Economic News is only beginning to get positive now.  For example, the government bail-out of Public Sector banks, Moody’s rating agency upgrade etc. I believe that Euphoria gets full blown once Economic News becomes very positive. We are some time away from that.
• The recent correction of midcaps since early January and rotation to sectors such as IT has been heartening showing that investors are ready to move away from stocks which have momentum.
• Finally, the fact that so many people feel in our poll feel that we are in Euphoria is also good news. Worry and Euphoria don’t go together!

In conclusion, I will go with the audience poll. We are in the late stages of the Optimism phase. But do remember, all the bull markets are different and have their own story, and this one will be different as well. But unless we are in a full-blown Euphoria stage, I believe that the chance of a deep market correction is low. I will keep monitoring the market pulse and recommend that you do too.