Historically, one of the most reliable ways to identify a bear market is across cycles, not through index levels, but by looking at the width and extent of the bruises in the broader space.One way to assess this, for example, is to look at how shares react to the news flow.
In a healthy market:
- Good news is rewarded.
- Bad news is digested with dignity.
In a bear market:
- Good news is met with a yawn.
- Bad news is punished and often disproportionately.
That asymmetry is crucial. Today we witness that eerie pattern.
Strong profits, better guidance or business developments are met with indifference. On the other hand, even slightly negative developments cause sharp declines. This is what a bear phase looks like: not necessarily a dramatic crash of the major indices, but a steady erosion of breadth, sentiment and risk appetite.
It looks more like a rut for indices, but the broader space, especially the small- and mid-cap spectrum, tells a different story. At the benchmark index (BSE Sensex) level, the chart is not showing much pain. It is down just 4% since the end of November last year. Even at the
At the BSE small-cap index level, the decline is not as sharp as the portfolios reflect. It’s only down 6%. But at the individual stock level, the decline has been steep, with nearly 50% of the small- and mid-cap universe down more than 50% from the highs they reached in September 2024. One of our internal studies found that in nearly 20% of our tracking universe of 1,000 companies, stock prices fell 70 to 75% from their September 2024 highs. That’s the extent of the carnage in the broader markets. As one study shows, if you go by the technical definition, almost 80% of the broader market is in a bear market.
In short, the bears that have been hiding for a while have emerged again. Now that they taste blood, they are unlikely to loosen their grip unless some extraordinary positive development puts them on the fence.
Many examples come to mind where price action has been disproportionate lately. The sharp fall in UPL shares, which fell by as much as 18% or more following the announcement of a group restructuring amid fears of high debt and Holdco cuts etc. is a good example of this. High debt levels were not new, except that the market is now in a mood to increase potential risks. Same is the case with IDFC Bank. It lost over 14,000 Cr market capitalization due to the potential loss value of 590Cr fraud. The markets are in a less forgiving mood. Likewise, Dishman’s decline of more than 10% after a mild rating agency downgrade reflects the level of bearishness in the broader market. One can go on.
This feels less like a visible crash and more like a stealth sell-off, especially in the broader small- and mid-cap space.
And historically, such phases are painful, but so are when long-term opportunities begin to quietly unfold. At the same time, it may be unwise to expect an immediate recovery. It may linger for a while. The wisest thing to do in such a sell-off is to take the opportunity when the valuation is attractive, rather than trying to time the bottom. That approach will require a stubborn stomach to deal with temporary and imaginary losses. With such a negative undertone in overall sentiment, the number of opportunities one can identify with attractive FCF and payout yields, yet high growth potential, has risen sharply. Exciting times for bottom-up stock pickers. It’s time to put capital to work, not time the bottom!
ArunaGiri N, Founder, CEO and Fund Manager, TrustLine Holdings Pvt Ltd
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