What After -20% Correction? [Short Analysis]

Yesterday, I sent out a note to my clients about the on-going market correction. And while talking to one of them, he asked me how much lower could the Nifty go?

Since I don’t have a crystal ball, I could not predict anything.

But I still wanted to see what past had to say about it.

So I picked up Nifty50 data for the last 20+ years. Starting from 1^st Jan 1999 to be precise and up to 16^th March 2020.

I wanted to see what happened after Nifty fell by more than 20% (when compared to its most recent All-Time-High).

This short analysis led me to this table. Study it for a few minutes and then I will explain:

Here is how to read this table.

Take the row with date 14-May-2004.

This is the date of Nifty50 going -20% below for the first time since making the most recent All-Time-High it made (1982). And the drop below -20% happened 82 trading sessions after the ATH was made. But the fall did not stop there. The Nifty had a maximum drawdown of -29.9% (below previous ATH) before it rebounded and went on to make a new ATH later on.

Let’s take another row: Take the row with date 22-Jan-2008.

This is the date of Nifty50 going -20% below for the first time since making the most recent All-Time-High it made (6287). And the drop below -20% happened just 10 trading sessions after the ATH was made. But the fall did not stop there. The Nifty had a maximum drawdown of -59.9% (below previous ATH) before it rebounded and went on to make a new ATH later on.

Since the start of 2020, the Nifty first made a new All-Time-High of 12362 on 1th Jan 2020. And 41 trading sessions after that, it painfully grinded down to more than 20% below that ATH on 12^th March 2020 when it closed at 9591.

So how will this latest breach of -20% pan out?

Till now and at the time of writing (16^th March 2020), it is down 25.6% from the ATH.

We will only know in hindsight how much lower things will get before we begin the next move towards a new ATH.

But as is evident from the last column of the above table, a fall below 20% doesn’t mean that it stops there. In fact, if we exclude the current fall, then out of the 6 instances in the last 20+ years, the fall has deepened to more than 50% twice. It has touched almost 30% thrice. Only once has the fall stopped around 22-23%.

So even though we have limited data points, history tells that only once did the fall stop around 20%. Rest of the times it went further down.

As for the current correction of more than 20%, let’s see how this one goes. Currently, it is at -25.6% from the last All-Time-High: