Catch The Falling Knife During Corona Crisis
Historically, the India SENSEX reached an all-time high of 42,273.87 in January 2020. However, it lost 16,292.63 points or 38.5% since then when it recorded it its lowest value of the quarter on 23 Mar at 25,981.24. In the month of March 20, it recorded its second double-digit fall of -13.15%, after it recorded the first double-digit fall of -10.96% on 24 Oct 08. On March 20, it also recorded the other two highest falls so far from -8.18% and -7.96%. Nevertheless, the question remains whether the investor wants to catch the falling knife? For an investor, a falling knife is a sharp drop in the market. However, the bottom and the duration of the drop is not known to him. Therefore, the investor uses the falling knife with caution and does not invest in the market during a drop.
A careful study of the 25 major Sensex drops since 2006 reveals a positive outlook for the investor to capitalize. He must carefully study the fall and not form a biased opinion due to the large points change in the value. Instead, he must focus on the percentage change from the fall. In the table below, it is evident that the largest points fall of March 20 was not the largest percentage fall. The fall of October 08 changed the market perceptibly and to date stays the largest percentage fall in history. The other aspect of relevance is that even after the 25 falls in 14 years since 2006, the Sensex has climbed almost 5½ times from its lowest value of 7,697.39 on October 08 to its highest value of 42,273.87 on January 20, i.e. 11¼ years. Next, is the point regarding the duration of the Sensex reclaiming and moving beyond its previous closing value in these falls. Table 2 below indicates 10 of the 25 major fall instances since 2006. The duration of these 10 falls subsumes the remaining 15 other instances of fall. A significant point that emerges from this table is that the duration of the Sensex reclaiming and moving beyond its previous closing value varies from 2 to 36 months. The average duration of these 10 major falls is 13.5 months or just above a year.
Table 1: Major Sensex Falls
Although the markets are volatile and unpredictable, yet one thing is clear and that is their recovery with time. If an investor has a long-term perspective, then he must try and catch the falling knife since most of the stocks are trading close to their historical/52-week lows. For mutual fund investors, fiscal prudence lies in topping up their existing schemes through top-up SIP/STP or investing additional lump sum amount so that they make the best of this market fall and its associated uncertainty.
able 2: Sensex Reclaiming Previous Closing Value
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