With the Nifty and the Sensex as well as the Bank Nifty at all-time highs, it surely raises the spectre of a market correction. Most traders and investors tend to believe that the market highs are a signal that the market is overheated. But that may not necessarily be the case. For example, between 1981 and 2015 the Sensex moved up from 100 to 30,000. This was obviously not possible without consistently hitting new highs.
There is also a statistical way of looking at the market at these levels. For example, the Sensex was at the level of 30,000 back in March 2015. That means the Sensex has given a return of 0% over the last 2 years, which means you would have been better off keeping your money invested in a liquid fund. Let us take a slightly longer perspective from 2008 onwards. The Sensex had touched 21200 levels in January 2008. Over the last 9 years, the return on the Sensex is just 3.95% CAGR, which is slightly lower than what you would have earned in your savings bank account.
Why exactly are we discussing these statistics? The Sensex and the Nifty may be at the cusp of a major breakout as they have grossly underperformed over the last 9 years. The Indian economy is finally having the right combination of the right macro environment, the right input cost advantages and the right exponential growth in the domestic market. By focusing too much on Nifty highs and Sensex highs, it is possible to lose perspective of the real issues. That is why these 5 rules to follow when the Nifty and the Sensex are at an all-time high..
Five rules to follow when the equity markets are at an all-time high
1. A market peak is normally the right time to restructure your portfolio more meaningfully. When the stock market rallies rapidly it takes a lot of deserving and undeserving stocks along with it. You may find a lot of stocks in your portfolio which have appreciated sharply without any fundamental justification. This is the time for you to act! Talk to your broker; read up the company’s balance sheet, go through the online tools available at the Motilal Oswal trading platform and identify these stocks. Use these highs to exit these stocks in your portfolio and reallocate them to more quality stocks.
2. New highs and further highs are normally led by big growth stories. When you allocate money, look out for where the growth is. It may appear quite enticing for you to rush in to buy stocks that are out of favour and have corrected sharply. Remember, when markets move into a positive orbit, the rally is rarely driven by beaten-down stocks. They are necessarily led by the growth stories and that is where your focus should be. A market high is the time to latch on to growth and not to your perceptions of deep value.
3. There is a popular saying in the market that profit is what is booked by you; rest is book profits. As a trader or even a short term investor, do not miss any opportunity to book profits consistently. If you bought a trading stock with a target to earn 20% in 6 months and the stock is up by 25% in 15 days then you must look to book profits. After all, if something is too good to be true then it is most likely not true. Such an approach also ensures that you always have adequate liquidity available when the market gives intermediate corrections.
4. Use a combination of hedges and rolling stop losses for your long term portfolio. Assume that you are convinced about the 5-year prospects of stock ABC Ltd. Your broker is convinced and your research also supports the view. If the stock has already reached the target in 1 year what should do? The answer is you can look to trade with rolling stop losses. Keep moving the stop loss higher as the stock price moves higher. Another way is to use put options to hedge your long side risk. This not only protects your downside but also enables you to make money when the market turns volatile.
5. Lastly, keep an eye on the one-factor that is driving the market rally in the first place. There could be a variety of reasons. It could be global flows, it could be a surge in liquidity, and it could be a genuine turnaround in performance or even a sharp spurt in revenues and profits of Indian companies. That is where the monitoring comes in handy. Irrespective of what is driving the market, keep an eye on the one factor that could seriously impede this driver. If you see that changing, then it is time to be cautious.
These five rules at new highs are not exhaustive but indicative. However, they can surely act as a one-touch guide for traders and investors in the current market scenario.