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You have to be amDhoom2Sensex2006azed at the size and passion of the Bollywood film industry.  It churns an incredible amount of work every year, and you have to admit that their movie stars are just stunning – I am talking about the female ones but take your pick. we don’t discriminate here at Viracocha -.  Up to now, we have done some market crash analyses for the US markets, so I felt it was time for the Indian market.  There had been a few hiccups there too, our frist stop is the Sensex crash of May 2006.  Which brings us to the subject of the main picture/banner of this post.  The movie Dhoom 2 was the highest grossing picture of all time in India in 2006, a mega blockbuster filmed internationally across India, South Africa and Brazil; not unlike the inter-connection of the financial markets come to think about it.  So with the high fueled action of Dhoom as our context, let us take to the Sensex crash.

This is form The Hindu online newspaper to give a little of history:

May-19 2006

MUMBAI: In an unprecedented fall, the Bombay Stock Exchange 30 share Sensitive index (Sensex) shed 826.38 points on Thursday, the highest ever fall in the history of Indian stock markets. While some argued it as a reaction to an instruction directed at foreign institutional investors (FIIs) by the Central Board of Direct Taxes (CBDT), others are having a view that the fall is in tune with other global markets.

“It is only a reaction to the sentiment on the international markets. Basically, the metals have fallen and it is in tune with that,” said A. Rama Mohan Rao, Managing Director, UTI Securities Ltd. However, “I believe it is an opportunity for investors with a long-term objective.” According to him, the CBDT circular, which was widely discussed, is not having much impact. “The CBDT circular is not the core reason for this reaction. Percentage-wise, we have to be ready for such a correction.” The maximum fall in a day till date is at around 12 per cent. Today it is only 7 per cent. “We should not panic over absolute numbers. One needs to look at the percentage of fall,” Mr. Rao added.

May-23-2006

Explaining to newspersons as to why the market may have crashed and the steps devised to tackle the crisis, Mr. Jha said: “It appears that some brokers trading on the proprietary account may have come under margin pressure and, therefore, may have sold. The RBI has made it clear that banks have been advised to provide ample liquidity to those who may require money to meet margin requirements. Banks are doing so. That position stands and will continue to do so.”

Charting the free fall in the market over the last seven days, Mr. Jha said the Sensex closed at 12217 on May 17. The extreme volatility in the bourses since then, he said, was due to a number of factors. These were the fall in global markets, the meltdown in metal prices, hardening interest rates and the relative attractiveness of other emerging stock markets. “While there were some speculative reports about a draft circular put out by the Central Board of Direct Taxes, the matter has been clarified to the satisfaction of all concerned. It is reiterated that the draft circular made no reference to FIIs. FIIs are governed by separate provisions of the Income-tax Act and the relevant double taxation avoidance agreements… the Indian growth story remains a vibrant growth story,” Mr. Jha said.

 

So, no shortage of opinions as you can see.  There are more opinions to show, but you get the picture.  Now let’s put the data to the test.

This analysis one was a bit of a pickle since the Sensex index had been up, until that day in May, in a steady climbing trend.  So for this analysis we had to, for the first time in our Crash Courses, refer also to the MACD indicator so that we have some more clarity on what is going on.  The underlying technical cause for this is that since it is a quasi-steady climb, then the value of Viracocha indicator wouldn’t flag any significant variation from the overall change rate, but MACD is handy in these instances since it is showing the difference between two moving averages -as y’all probably know-.  This very fact is also making a less dramatic relationship between Value and Volume, so a calmed assimilation of the info is needed, since the relationship between the Viracocha lines is a bit different this time.

Here we have identified what we think are our important ‘events’ of that time series.  Since MACD was showing a whole lotta nothin’ until pretty much D-day we are going to focus on that later.  Let’s do first the Viracocha.

Event 0 – February 13, 2006 – Between Event 0 and Event 1 I am placing a sell zone ending in Event 1.  This is where the relationship becomes a bit different than our previous experience looking at markets in the US, so instead of a dramatic red ‘peak’ indicating to get out we have the volume line increasing from 1.9 then to 2.0 and finally to 2.1 thereabouts.  This can be translated to trades still being traded and continued to be traded as the price rose, so people were still kinda happy to trade.

Event 1 – April 12, 2006 – This is a very interesting plateau that starts after Event 1 and until May 22.  After April 12 it seems like the market is reacting to their buy craze and it is now realising that maybe we are overvalued.  Hangover if you will.

May 22, 2006 – This day is where the media gets in and puts focus on the thing (as in the attached media clips), but a midst all the ‘but’s and ‘why’s and ‘wait’s, the data is still showing a typical race to the bottom in Viracocha terms.  Both the Value and Volume of the index are following each other to the floor, then it is Volume who picks up first.

Event 2 – June 13, 2006 – Event 2 and Event 3 are displaying something we have seen in other market ‘crashes’ there is a bouncy ball effect just after the said crash, this could potentially bring some losses back to the black.  I have always wondered if around those times the fall is too close and too hard for some to react, but the data is cold and has no emotional memory as such.  So Event 2 is to get in.

Event 3 – July 12, 2006 – This is a clear signal to sell, and then the market returned to its quasi-steady trend upwards.

Sensex06

 

The MACD in this case gave us nothing clear until May 15, where then the very dramatic turn is displayed.  This May 15 ‘cross of the lines’ is somewhere between Event 1 and May 22, so it is in our view a confirmation to get out, like pronto.  In hindsight we could say that this ‘crisis’ was a bit of the slow boiling of the frog, where the common story states that since temperature is raising slowly the poor fellow gets cooked.  In saying that we still believe that the signs were there, only masked in the subtle perfumed moonlight environment of one of those wonderful dance numbers on Bollywood.

Sensex06macd

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