Bottom Fishing: Has the time arrived for it?

Stock Market is the game played by FII & DII. Retail investors are like puppets dancing on their tunes. Agree?

The Indian stock market is done and dusted by a strong selling trend over the past couple of months. 

Starting from the Russia-Ukraine conflict to RBI’s repo rate hike to the rising inflation and falling global indices, the bears manage to find a new reason to sink the market every now and then. The BSE Sensex is already down by 8.21 percent this year.   

That was all about the damage that the Indian stock exchange has incurred this year. 

What next? That’s the question all stock exchange enthusiasts must be having now. Well, we are expecting some positivity in the market within the next few days. And, the last week’s strength in the Sensex might hint at an upwards trend in the remaining half of 2022, as indicated by the statistics. The BSE Sensex saw a 2 percent growth over the last week, including around 3 percent gains on the weekly closing. 

This might indicate that the bottom fishing mode is on in the Indian stock exchange. And the market is ready for a bullish rally in the latter half of 2022. 

Before we look at the historical trends, let’s understand what does bottom fishing mean? 

What is Bottom Fishing?

Bottom fishing refers to investors’ behaviour characterized by buying stocks at their most consolidated or undervalued levels. However, it doesn’t solely mean investing in just any falling stock. 

A true bottom fisher cherry-picks the fundamentally strong assets that have observed temporary consolidation due to environmental factors rather than individual reasons. 

At the same time, bottom fishing can sometimes be a risky strategy as it is difficult to predict if the stock has corrected enough and is ready to bounce back. Therefore, it is important to negotiate factors like global scenario, fundamentals of the asset, debt, management of the company, and its future plans. And of course, as Warren Buffet advises the investors, “Do not put all your eggs in one basket.”

The successful bottom fishers may fish for the stocks that are trading at low P/E (price-to-earnings) ratios over their prior readings. They may also keep an eye on favorable PEG (price/earnings-to-growth) readings. It may help them decide if the stock is trading at a favorable price basis the company's earnings potential in the future.

Further, they watch out for technical chart patterns that reflect a bounce back from the bottoms. The most commonly used references are a rounding bottom, double bottom, an inverse head and shoulders, or cup and handle reversal.

Overall, they try every trick in the book, take every possible precaution, wait for ample consolidation in even the most fundamentally strong stocks, and of course, stay patient until they are sure it will pay. 

But still, not all bottom fishers make money. So, be watchful.  

Is it the right time for Bottom Fishing?

While no one can say this with confidence when it comes to the stock market, we have analyzed the data of the last 15 years to conclude.

The Stock Market Bloodbath of 2008

The economic crisis of 2008 was one of the worst in the history of stock markets across the world. And the situation in the Indian market was no different. 

The market started collapsing in December 2007, and the bear run continued till February 2009. The year 2008 can be marked as the darkest year of the Indian stock exchange which witnessed a whopping 128 percent fall in just around 15 months.

But, soon the happy times were back!

Bad days don’t bother you for long if you do your basics right in the share market. Because within the next 10 months, the market was around 96% high from its Feb 2009 levels, from 8891.61 in Feb. 2009 to 17464.81 in Dec. 2009. 

And the market went merrier! 

The 2008’s setback didn’t affect the spirits of the bulls, as the market didn’t look behind after that. In Dec 2010, the BSE Sensex hit its lifetime high and closed at 20509.09 points.  

Falls led to High Rises

As we say patience is the key in the share market. History shows that the market has fallen for unprecedented RISES every time the market has fallen.

Have a look at the table below:

In the year 2011, the BSE Sensex registered around a 33 percent decline. But, the indices grew by over 50 percent over the next three years. 

Similarly, the exchange fell by over 5 percent in 2015, only to grow by a whopping over 73 percent over the next 6 years. 

The bottom line is that in the last 15 years, the market has never depreciated for two consecutive years but it has appreciated for 6 consecutive years. And that’s how bottom fishers make money. They buy at the lowest and sell at highs, even if they have to wait for 3-5 years.

Despite some disastrous declines, the Sensex was still around 187 percent higher at the end of 2021 over the level at the end of 2007. And that’s the beauty of the market; it falls big to rise even bigger.

The Bottom Line

The market has once again found itself downhill. You may blame the global crisis, a war situation, and many other factors. But if you see the trend the consolidation was inevitable after running relentlessly for the past six years. So, stay positive. Invest prudently in good assets. You can start investing slowly so that you can go out fishing if there are new bottoms.