Market Cycles, Investment Psychology: Greed, Fear & the Golden Rules for Success
Recap of performance in Feb’25 and current month
The Indian stock market continued the corrections started since sep’24 in Feb’25 month as well with nifty correcting -5.9% and Sensex -5.6%. This Five months of consecutive corrections since Oct’24 is an exceptionally rare occurrence that hasn’t happened in the last 28 year. These consecutive corrections did not happen even during 2008 recession and 2020 Covid crash to give a perspective. However, this month may turnaround, likely to halt this correction and close in positive. Market by its nature is volatile and both optimism and pessimism do not last very long. Along with Nifty most sectors, midcap and small cap have made a decent recovery considering the magnitude of fall happened earlier. Global markets especially US Markets and many tech stocks have seen big corrections in Feb month and have made small recovery this month. Indian market though was in correction mode since Oct’24, global markets corrected recently due to tariff war uncertainty, fear of global recession and Investors moving to safe haven like gold and bonds. The Indian markets though have rallied recently but whether it is sustainable and bottom is formed is still a question. FII selling continues this month as well and they have pulled out Rs 3.6 lakh crores out of Indian market since Oct’24. DII has supported the market to a great extent by buying Rs 4.1 lakh crores during same period. Other concern includes fundamentals like economy growth, high valuation in various pockets, rupee depreciation, fiscal deficit, muted corporate earnings, global uncertainty and geo political risks.
Sectoral performance
The markets witnessed broad corrections including all sectors and market cap. Some sectors were hit more compared to the others. The sectors which corrected the most in Feb’25 month were Realty -13%, IT -12%, Energy -12%, FMCG -11% and the sectors corrected the least are Metals -2%, Banks -3%, Pharma -7%. The midcap corrected -10% and smallcap corrected -12% in Feb month vs largecap which corrected -6%. Hence, it is time to rebalance the portfolio considering these corrections and investing in sectors and stocks where value seems attractive for better returns from long term perspective. The sectors which can do well currently are Banks, PSUs, Pharma, Auto and the sectors which can underperform are IT, FMCG, Metals. Further, corrections in smallcap and midcap can be utilized to invest in quality stocks in this category.
Global Market outlook including commodity
The global economy is facing a slowdown with lingering inflation and uncertain policy environments, according to the OECD’s latest Interim Economic Outlook. Global growth is projected to slow to 3.1% in 2025 and 3.0% in 2026, with significant differences across countries and regions. The US Administration is reacting to market concerns that tariffs and tariff uncertainty could have negative consequences for the US economy. In a meeting with reporters, President Trump said that he will not rule out recession or higher inflation. He suggested that the current policy adjustment will have costs, but that they will produce positive results over time. The fear of recession is there but still there is divided opinion on this. In response, countries are announcing / preparing for retaliatory tariffs. EU, Canada, China and other countries may take measures as tariff war unfolds. Dollar which has been strengthening so far against most currencies may consolidate around this level. Gold & Silver remains the most preferred asset class considering the Bull Run it has seen so far. It out performed last year and in upward trajectory though at a muted pace. This asset class in not very volatile compared to equity but it have time corrections and extended period of consolidation based on historical trends. Hence, diversify the portfolio with a portion of this asset class for stability. Gold currently trading at Rs 88k/ 10 gm as on date and Silver closed at Rs 99k/ 1kg
Market cycles & Golden Rules
One of the primary and timeless tenets of Investment wisdom is that market follows cycles. Every market euphoria and crash has made people say “this time is different”, yet every cycle follows the same pattern. Broad cycles are recovery, Growth, top, Euphoria, decline and bottom.
Recovery – Economy is weak, central bank cuts rates, Government spends money, Investors get hopeful, Assets look cheap and Smart money buys.
Growth – Things improve, Companies make more money, People feel confident, Banks lend more and
Assets rise in value.
Top – Everyone gets optimistic, danger signs appears, optimism becomes greed, Everyone’s talking about getting rich, FOMO kicks in.
Euphoria – People believe “This time is different”, rally will continue, Crazy valuations, flow of IPOs encasing on Investor behaviour, Common man giving and sharing stock tips, Get-rich-quick schemes and never ending optimism sets in
Decline – Reality returns, Smart money sells, Bad news appears, Prices start dropping, “Buy the dip” fails
Bottom – Fear takes over, Forced selling, Media turns negative, panic sets in, everything appears cheap, never ending pessimism, common people feel pain and don’t want to invest, smart money buys again
Causes – Greed & Fear govern Investor behaviour, recency bias sets in, Herd mentality is followed, Investors keep making same mistakes, hence market cycle repeats
Lessons – During recovery buy quality assets, use leverage carefully, stay disciplined, diversify and think long term. During growth ride the wave, do rebalancing, Stay rational. During Euphoria do some profits booking, reduce risk, invest in defensives or raise partial cash. During Decline stick with quality stocks, risk management and proper asset allocation. During bottom increase equity portfolio, invest in pockets where attractive valuation appears, identify change in sectoral trends, stay disciplined and think long term
Golden rules – Market works in cycles, discipline and patience gets rewarded, quality survives, accept volatility as part of long term investing, invest regularly, manage risk, diversification and asset allocation based on risk tolerance and financial goals
Outlook for the Indian Market
The Indian market is at better valuations after the recent corrections. There can be period of over valuation and undervaluation at times due to Investment behaviour of optimism, Euphoria and pessimism. The sectors which run up the most corrects more and vice-versa during this uptrend and downtrend. More insights have been provided in the previous outlooks both cautioning during high valuations and adding during corrections. The investment strategies which previously discussed is re-iterated that do systematic investing, investing in quality assets, diversify across asset class, rebalancing and add more during corrections. These are timeless principles of Investing. Further, consult your investment advisor for prudent financial practices.
Fundamental outlook: Indian market is appearing to consolidate and recover after forming lows in first week of March. The recovery is seen across sectors including largecap, midcap and smallcap space. IPOs frenzy has muted. RBI and central banks across globe are taking measures for economy growth. Still there are headwinds like geo political risk, tariff war, macro concerns which may impact the economy and market. Market may experience some consolidation and mild volatility around this level.
Technical outlook: Indian market has been in downtrend last month and volatile this month with uptrend. Nifty has bounced back from 22000 level. The immediate support is seen at 22300 levels since Nifty has spent time around this level few times. The broad trading range as of now is 22000 to 23500. Nifty is in uptrend on basis of various technical parameters. The monthly RSI of 57 indicates neutral trend whereas weekly RSI of 45 indicates market is in oversold zone. The immediate resistance for nifty is 23300 and may face strong resistance at 23500 levels. The immediate support for nifty is seen at 22300 and major support at 22000.
