The Hindu Business Line : Sensex outlook for 2009

In our Sensex outlook published at the end of 2007, we had expected the 4-year old bull-market to end in the first quarter of 2008. But the intensity and depth of the decline in 2008 has been astounding.

The Sensex declined 63 per cent from its all-time high when it fell to 7,697 in October. That makes this the worst correction in the last three decades. Most correction in recent times halted around the 60-per cent retracement mark. But if we view the US markets during the Great Depression, the Dow Jones Industrial Average lost 88 per cent from its peak between 1929 and 1932.

Charting 2009

It is fairly certain that the move from the 21,206 peak is in its final stages. This wave is sub-dividing into a classic five-wave pattern. The devastation in September and October 2008 was the third minor of the third. The index can re-test the October low or even decline a little below in the final stages of this 5-wave move. The possible targets where the slide from January-peak can end are 8,000 or 6,200.

Investors can, however, look forward to a counter-trend rally that could begin in the first quarter of 2009 and extend for a few months. The targets for this rally would range between 11,000 and 13,000 depending on where the bottom is formed in the first three months.

Long-term outlook

We had mentioned in our review in October 2008 that decline below 9,700 will call for recasting the long-term counts. The magnitude of this correction implies that we are not just retracing the rally from 2001 trough, but we are probably correcting an uptrend of a much higher degree, that began before 1980.

The down-move from January 2008 appears to be the first leg (A wave) of the bear market. The second leg or the B wave that moves counter to the trend, can unfold in 2009 stemming the price erosion. Needless to add that there will be another leg down or the C wave that will follow the B and complete a 3-wave move. The entire cycle can easily extend beyond 2009.

It is difficult to envisage the shape that this B wave can take. It can be a sideways move in a wide range between 8,000 and 13,000 or it can be a swift up-move to 15,000 or 16,000 that ends abruptly trapping naive investors. Either way, investors need to be extra vigilant in rallies next year. The counter-trend rally in 1930 in DJIA (B wave) retraced almost 50 per cent of the prior down-move, but the index lost 86 per cent from the B wave peak by the time the entire cycle ended. The pull-back rally in June and July 2000 is another case in point.

To sum up, the Sensex could remain volatile in the beginning of 2009 and form a significant trough either around 8,000 or 6,200 in this period. A counter-trend rally can then ensue. The preferred range for Sensex for 2009 is between 7,000 and 13,000. The upper limit for the year is 16,000 and lower limit is 6,000. We will re-visit our outlook on a breach of either of these limits.

Lokeshwarri S.K.

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