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8-year equity model: Mkts may bottom out at 8320

Posted by Yogesh on Tuesday, 21 October, 2008

CNBC-TV18’s Haresh Soneji finds out the market trend in the past and what it means for this correction phase.

The 8-year equity model
Sensex has been following the the eight-year equity cycle since 1984 but the data from the 1984 cycle is not collated.

The 1992 cycle
Equity markets peaked in April, 1992 and 40% correction happened in just three-months between April-July, 1992. The markets then bottomed out in April, 1993 (60% off peak). It reached Sensex PE bottom at 10x earnings (4-quarter trailing). It retraced previous high in October, 1999. So, it took 6.5 years to reach April, 1992 highs.

The 2000 cycle
Equity markets peaked out in February, 2000 and 40% correction was between February-October, 2000. Sensex then bottomed out in September, 2001 (58% off peak). Sensex PE at bottom was at 10x earnings (4-quarter trailing). It retraced previous high in January, 2004 and took 4.25 years to reach February, 2000 highs

The 2008 Cycle
Sensex peaked in January, 2008 and 40% correction was between January-August, 2008. The expected bottom was seen around 8320 (60% off peak). Expected Sensex PE at the bottom was at 10x earnings (4-quarter trailing).

So, what we witness in all the 8-year equity cycles is that markets bottoms out at 10x PE. From the past, we see that consolidation is getting narrowed down and reach to the previous highs is getting shorter. We can see the markets bottoming out at 8320 levels based on the 8-year equity market. Consolidation phase would take anywhere between 24-36 months. Source Moneycontrol

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