Max Pain: A historical analysis of the Indian Index

The Coronavirus event has been taking a toll on human life since Nov-Dec '19. The world markets have taken a tumble and then recovered in the same period. I am not sure how many market participants have seen previous collapses in indices. I have seen only the 2008 as a student of Finance.

The loss in human life and means to living has been devastating therefore the pain suffered in the markets is absolutely inconsequential so to speak.

Here is the chart of Sensex since April 1979 both in absolute terms and on log scale.

Here is the maximum drawdown in the Sensex.

Here is now a look at three recent drawdown events in the Nifty 50 index. All charts are superimposed.

Here is something called a 'Lake Chart' since the late 80s. The volume of water in each lake is essentially the pain one has to endure.

Here is what I have devised on my own. I call it the 'Triangles of Pain' (ToP). It is a slight variation of the Lake ratio. Each of the right angled triangles (not absolute but approximations) show how acute the pain was and how long did the pain last. The area of a ToP is essentially the total pain endured. The key point is that if the base is small and the the area is large then the period is more painful.

I have mentioned the 6 biggest ToPs and the 7th one being the current Covid triangle.

The summary of the ToPs are as follows.

Looking at this, the pain of losing portfolio value (in this case the index) is not at all much in the current drawdown (Triangle G). But in cases of 2008 crisis and the Dot Com crisis the pain would have been unbearable.

This is hindsight analysis but if the global economy were to be disrupted with supply chains getting shaken up and a lot of labour issues we really do not know how long this will last. I take most of the predictions with a large dose of salt. At present even the greatest investor Mr Buffett (& his partner Mr Munger) prefer to stand still as they are saying 'I don't know what will happen'.

I am a mere mortal.