Nifty 50 closed on the 18th of April 2022 at 17,173.65, and Sensex 30 closed at 57,166.74. The historic, all-time highs of the BSE Sensex 30 and the Nifty 50 are 62,245.3 and 18,604.45.
The escalating Russia-Ukraine war, commodity price inflation, and the major central bank’s tightening trajectory have resulted in 8% -10% market corrections. But market valuations of several stocks are still very rich.
The US Federal Reserve’s plans for aggressive monetary policy tightening, including quantitative tightening, and the RBI’s reluctant but increasingly hawkish stance, could mean further corrections in stock prices await us.
Strategy to pursue when market indices and stock values are near historic highs:
- Restructure your portfolio:
When indices climb to their all-time highs, all deserving and undeserving stocks also accompany their climb. You can check all your portfolio holdings, look at stocks’ intrinsic values, and compare them to their market values. You can prune all undeserving candidates from your portfolio. You will have the advantage of being able to exit overvalued stocks at high prices.
When the market corrects, you can conserve the cash to purchase other fundamentally good stocks on your watch list. You can do this quickly through your online trading platform.
2. Companies with good growth prospects:
Look for companies that signal near-term and medium-term growth prospects. Different industry sectors find flavour at different points in time. Sometimes, there is a short high growth cycle in different industry sectors. Some stocks look beaten down and undervalued compared to other industrial stocks. Their undervaluation makes them seem like fundamentally good prospects.
The danger is they may belong to the sunset sectors of the market, which are not likely to see a significant increase in prices in the near term. It is better to target companies that belong to the sunrise industrial sectors, which have not completed their upward trajectory despite having seen good growth. Low P/E stocks and undervalued stocks are not necessarily good stocks with the potential to run up.
3. Book profits consistently:
Always make it a point to book profits consistently. If a stock that you own has moved up too fast, make it a point to book profits in that stock. A 15%-20% move up very rapidly means the probability of a downward trajectory in that stock shortly is very high. Don’t let greed overcome fear.
The volatility and fluctuations of stock prices mean that profits on the books may remain ephemeral, especially when there is a trend reversal. Stock prices do not always trend in one direction. If the intrinsic value and fundamentals of the stock are reasonable, you can always get an opportunity to buy the stock when it trends downwards. Keeping a portion of your portfolio in cash is always a good strategy, especially to seize opportunities to buy good, undervalued stocks. Orders and stop-loss limits can be easily placed through an online trading platform.
4. Appropriate hedging and stop-loss limits:
Maintaining appropriate hedging strategies, especially with covered options and futures to hedge the portfolio, is always a good strategy. When the portfolio value is trending downwards, the hedges will appreciate value, minimising the portfolio losses. Don’t forget your stop-loss limits for your buy/sell orders.
The stop-loss limits should also be pegged higher to the market trends. Remember, stop-loss limits are not stationary points but levels that adjust according to the market direction. You can access all types of instruments when you are doing online trading.
5. Understanding the impact of macro and micro trends:
Be aware of environmental, sector-specific and company-specific reasons for the causes of upward, downward movements in stock prices and trend reversals.
The causes could be many:
– Monetary expansion causing an increase in global flows or monetary contraction has the opposite effect
– Increase in domestic liquidity or contraction therein
– Positive earnings surprises due to better performance by companies in the form of increased revenue and profits or vice-versa
– Company receiving a big order which means a sustained increase in business and bottom line
– Improvement in a sector’s performance etc.
Being aware of macro and micro trends playing out in the economy is very important as the company’s stock price performance depends on it.