Stock Tips For Short Term

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Markets are a cycle, no rocket science there! But somehow we

tend to believe that the market is uni-directional – irrespective
of whether is it a bull run or a bear trend! When the markets
were at 21000 levels D street was full of positive news that
markets in a short term will touch 25000 levels, so much
optimism turned to complete pessimism in less than a year
when in Oct ’08 markets hit a low of 7.6k. But markets, they
never grow tired of throwing surprises, which makes even the
best of market pundits sit up and watch!
1. Stay cautious when markets turn euphoric

Date Sensex % Fall

6,150.6
Feb-00
9
-
2,904.4
Apr-03 52.78
4
%

5,920.7
Dec-03
6
-
4,227.5
May-04 28.60
0
%

12,671.
May-06
11
-
8,799.0
Jun-06 30.56
1
%

21,206.
Jan-08
77
Oct-08 7,697.3 -
9 63.70
 %

Although the force of gravity is something that would apply

pre-dominantly to physics, this holds true for equity markets as
well. What goes up, comes down – if there is a steep run-up
and valuations get expensive, then it is bound to make a
turnaround and come down to moderate levels. Hence, it
becomes important to stay cautious when the markets turn
euphoric.
Since, October 2008, markets have not looked back; we scaled
all the way up to 18k levels by July – 2010, it’s been a choppy
ride over the past 21 months, with an upward bias. The P/E
(price / earnings) which is a key indicator of whether the
underlying instrument is overvalued or undervalued, was at 12
levels when the markets went all the way to 7.6k levels after it
hit an all time peak at 21.2K levels in Jan-2008 when the P/E
stood at 25.5 levels and markets were grossly overvalued.
At current levels, Indian economy is definitely healthy,
however, at the rate the market is scaling new heights despite
very moderate fundamental change, it definitely requires us to
be cautious of a possible correction.
2. Avoid herd mentality
‘Buy low, sell high’, now how hard could that get! While we
were young, we always wanted to have what the other person
had. When it is the time to book some handsome profits and
sit tight on cash, we end up entering the markets precisely
then! Source – AMFI, BSE India
This graph tells us how many times we have gone wrong and
the best part is that we have never bothered to learn anything
from the past. The past few months seem to have an inverse
correlation where the markets have scaled up, possibly due to
factors like change in regulations and thus may not be truly
reflective of the state of affairs. Only time will tell if we have
walked wiser from the experience we had during the 2008 fall.
3. Systematic Profit booking at market high
‘Just a little more and I promise to get out of the stock’, this
approach really does not work – you will never get the peak or
trough right! It is always advisable to exit from market in
phases; a certain percentage of portfolio should be sold when
markets breach a certain level. This not only helps to reduce
the risk but also provides an opportunity if the markets move
on further. In the whole bargain of ‘just a bit more’ we often
see the returns completely erode and sometimes get into red!
This infact is a dangerous preposition and hence, would make
sense to fix the target and stick to it at all costs.
4. Get rid of penny stocks

Certain stocks see phenomenal rise may be more than 30%,

however this rise is purely on rumours and such companies
could be lacking sound fundamentals. Every time you will
notice that the penny stock which was a hot pick in a bull run
will be nowhere when the markets tank – they are the first
ones to go down, infact they may even shut their businesses,
so one should always get rid of such investments.
5. Fear and greed steal the show
When the markets were at 21k there was a sense of déjà vu,
everybody was sure that the markets had formed a
unidirectional pattern and it would simply keep moving
northwards, however, the turnaround happened when least
expected and when the markets did turn sharply, panic selling
occurred which pulled down the markets sharply.
Fear and greed always have an upper hand in markets, during
bull run markets are driven 70% by greed and 30% by fear
whereas the same is reverse in case of bear phase. A
contrarian strategy always helps, when people are fearful that
the markets will come down be greedy to grab the stocks at a
particular price, when people are greedy that the markets will
climb further be fearful and start exiting from the markets.
6. Heady mix of debt & equity
Amidst all this hoopla, there is one thing that comes to rescue
– Diversification. Too much into equities or too little – both are
situations that you do not want be caught in. Statistics have
proved that equity is one of the best asset class to invest in,
global averages indicate that in the long term horizon it gives a
return of atleast 15% p.a - however it is a game of patience
and strategy which requires commitment from a medium to
longer term frame. Also, it is important to de-risk your portfolio
at regular intervals; this can happen only if we are stringently
booking profits at relevant levels of the market.
It is probably the right time to evaluate your asset allocation
and look at derisking your portfolio. For investors who are
getting into the markets one needs to be cautious especially if
one is making lumpsum investments. Systematic investments
could be a better option at this time.Since we are all euphoric
about markets scaling new heights, this author may be
accused of playing spoil sport, but all I want to say is ‘Tread
with care!’