The air is thick with market caution right now. Headlines reflect uncertainty, analysts express concern, and many investor conversations carry that unmistakable edge of wariness. Yet amid these challenging conditions, several interesting signals are emerging. Could the market be standing at the beginning of something meaningful? A potential rally? An opportunity hiding in plain sight?
Thanks for reading The Merisis Wealth Substack! Subscribe for free to receive new posts and support my work. 2025 is shaping up as one of those pivotal years when markets undergo significant transitions. While volatility and uncertainty are present, this environment may present an excellent opportunity for long-term investors to position themselves for future gains.
Current Market Context
What's important to remember is the cyclical nature of markets. This correction, like all before it, will eventually run its course. The key question becomes whether the market is approaching or has reached the bottom of this cycle, or if more adjustment lies ahead. Several indicators provide valuable insight into this question.
Key Indicators Pointing to Potential Opportunity
Currently, this indicator shows a remarkable reading. Within the Nifty 500 universe, only 10% of stocks are trading above their 100-day moving average, and ~14% above their 200-day moving average – striking figures by any measure. Such extreme prints on negative market breadth have been recorded only 4 times in the previous 7 years (including the current one)
Historical patterns suggest that when these levels are reached, they often mark the foundation for a durable market bottom. What appears as a challenging signal today may be setting the stage for a potential market reversal in coming months.
Momentum Suggests Potential for Recovery
The RSI (Relative Strength Index) offers another valuable perspective. When this indicator drops below 30, it traditionally suggests an asset is oversold and potentially due for a rebound. Looking back over two decades, when the weekly RSI for midcap and small-cap indices has fallen to around 30 levels, a substantial rally has typically followed in ensuing months – averaging around 20% over the following three months.
Currently, the Nifty 50's RSI stands at 29, approaching that significant threshold. This suggests the risk/reward ratio is becoming increasingly favorable for tactical investors.
Market Divergence Signals Potential Shift
Perhaps the most intriguing development is the clear divergence in market behavior. While the Nifty 50 has reached fresh lows, several broader indices – including BSE Midcap, BSE Smallcap, BSE 500, and Bank Nifty – continue holding above their recent bottoms.
This pattern suggests the broad-based sell-off may be losing momentum. The pressure now primarily affects large-cap, liquid stocks. Such behavior often represents the final phase of market adjustments – that concluding wave of selling before conditions begin to stabilize and improve.
Forward Outlook
Where might markets go from here? Has the bottom been reached, or is further adjustment ahead?
While precise market timing remains impossible, analysis of both historical cycles and current data suggests this corrective phase may be approaching its conclusion. Current conditions resemble the final stages of market capitulation, which historically has preceded meaningful recovery periods.
The next 4-6 weeks could potentially bring a significant market bounce as extreme caution begins to fade and investors position themselves for recovery.
That said, perspective remains essential. A relief rally doesn't necessarily signal the complete end of challenging conditions. Markets could experience a healthy bounce in the short term, followed by further normalization as valuations continue to adjust.
Addressing Key Questions
As markets progress through coming quarters, stocks may not immediately return to previous highs. A combination of price correction and time-based consolidation will likely bring valuations back in alignment with long-term earnings growth potential.
Investors should prepare for a measured recovery rather than an immediate V-shaped bounce. The period following the initial relief rally may present particular challenges, requiring both patience and strategic positioning.
Potential Rally Parameters
While this rally could demonstrate strength, it won't be without complexities. It might create optimism and convince many observers that markets have found their definitive bottom, but prudent skepticism remains warranted given the broader economic landscape.
Navigating 2025: Strategic Considerations
The fundamental principle for long-term investing success remains straightforward: avoid overpaying for businesses regardless of sector or theme.
The elevated valuations witnessed in recent years are likely behind us. Focus should now center on identifying stocks offering genuine value rather than following momentum. When we look back in the future, the valuation excesses witnessed in the past 24 months will likely be viewed as an anomaly than anything more.
For those with patient capital and long-term horizons, 2025 could present an ideal opportunity to position strategically. Well-chosen investments made during this period could establish the foundation for substantial success in 2027-2029.
Merisis Multicap Portfolio Positioning
The focus shall continue to remain largely on small and mid-cap opportunities through a fairly concentrated approach of 17-18 holdings in every client portfolio. As market conditions evolve, expect measured portfolio adjustments designed to capture opportunities presented by anticipated market movements.
Opportunity Amid Transition
The enduring principles remain valid: maintain strict valuation discipline, actively monitor changing business fundamentals, and maintain focus on the 2027-2029 horizon when today's carefully selected investments should demonstrate their full potential.
