Will the Stock Market Recovery Continue?

The Indian stock market staged a comeback this week. The Nifty was up 2.6% from last week's close.

This was due to many reasons. The fall in crude oil prices being the most important.

But does this mean the correction is over? Or is it just a temporary reprieve?

And what about a recovery? Will we see a V-shaped recovery like we did in April 2020 or will the market struggle at these levels for a long time?

We will try to answer these questions in this article...

Is the correction over?

Well this depends on who you ask. The bulls will say the correction is done. They will point to the 800+ points rally on the US Dow Jones index on Friday as proof.

Clearly, traders feel confident enough to carry their long positions to next week. This is something they weren't doing recently.

Now this doesn't mean we should confidently expect to see a sharp rally next week. But there are positive signs that the market is looking to make a short-term bottom.

The bears will say that even if the market forms a bottom, it's likely to be temporary. And they do have a point. The bulls aren't in control of the short-term trend...yet. Having said that, the bulls are the ones who will be more optimistic going into trade next week.

If they manage to take the market up significantly, past technical resistances on the charts, then we could say the correction is over, at least for now.

Is the rally temporary?

This is an important question. A lot of money will be made by those traders who get this call right.

If the market were to go up next week but then fall back again, then the bulls would be trapped at higher levels. They could panic and dump their positions.

If you are long on the market going into trade next week, this is something you should be worried about.

The bulls haven't won a victory over the bears recently. Every rally has been sold into. Until we see a sustainable rally, we can't say the trend has changed. So calling the rally temporary seems logical at this point.

Thus, if you are looking to make a quick short-term profit by going long, you must exercise caution and have strict stop losses in place for your trades.

Will the market recover?

This is a quest that will be answered in the long term. The obvious answer is yes, the market will eventually recover. But investors and traders alike will be interested in knowing when it could happen.

Unfortunately, no one has an answer to this question yet. There are just to many variables to consider.

For example, if the US economy were to enter a recession, the markets won't recover anytime soon.

There could be short-term rallies but these are likely to be classic bear market rallies which will get sold into.

In such a scenario, it makes sense to buy high-quality stocks selectively.

What kind of recovery will we see?

First things first. A V-shaped recovery seems to be out of the question right now. This is because there are far too many economic and geopolitical issues that could flare up at any time.

A more likely possibility is a slow and steady recovery that could last several months. Even in this scenario, we could see corrections that take stock prices down in the short term.

This is not a bad thing. It will give long-term value investors many opportunities to buy fundamentally strong stocks at attractive prices.

In fact many value investors have already begun taking positions in carefully selected stocks. Equitymaster's editors also recommend this approach.

You could find a multibagger stock.

In conclusion

The market may provide some relief for the bulls in the short term but the outlook beyond the short term is unclear.

While the market will go up in the long term, there will probably be considerable volatility before that happens. We could see more corrections in the near future.

This could be disheartening to short-term traders who are long on the market. But such a market will provide great opportunities for long-term investors to buy stocks on their watchlists.

You can create you own watchlists using customised screens in Equitymaster's Stock Screener.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...