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Wednesday, July 14, 2010

The Sensex has made a new high - are you feeling excited?

When the Sensex moves up towards a new high, the excitement becomes palpable all around. Unwanted SMSes and emails start flying around recommending stocks that no one has heard of and may not even exist!

Every day that the index moves up by 50 or 100 points, the talking heads on business channels bestow beaming smiles at the camera and talk about 'another good day' in the markets. If the index falls 75 points, the smiles disappear and solemn-faced comments pour forth - like, 'not a great day, may be tomorrow will bring some cheer'.

Participation in investment group discussions increase by leaps and bounds. Every one wants to buy. A paint company meandering below 600 for several weeks suddenly jumps up like a jack-in-the-box, and every one who ignored it earlier is now desperate to get in at 800 in the hope of seeing 1000.

The global economic situation is no longer grim, but has a long way to go before real and sustainable growth becomes visible. No wonder FIIs are pouring in money into Asian markets that have not only survived the down turn but are back on the earlier growth track.

How long will the current bullish fervour last? No one really knows. When some one else is paying for your (bull) party, why worry about when the party will end? Enjoy yourself while it lasts.

Like all parties, the good times will come to an end. Will you be the one who passes out on the floor and won't be able to get to work the next day? Today's trading made a 'reversal day' pattern - a higher high but a lower close. A sign of distribution?

Just buy two insurance policies, and you will have nothing to worry about. First, lock your cheque book in a cabinet and hide the keys. Second, for each and every stock in your portfolio, set tight trailing stop-losses. (If you don't know how to set trailing stop-losses yet, then you haven't read my FREE eBook.)

While it may be a good idea to be a contrarian - and be bearish when the whole world is excitedly becoming bullish - please don't make the mistake of selling every stock you own and move to cash. That is 'market timing' at its worst and can seriously erode your ability to become wealthy.

As you may have noticed, stock prices tend to rise in brief spurts, followed by longer periods of little or no upward movements. Unless you remain invested in the market, you will miss out on these price spurts in individual stocks.

By all means book partial profits, in stocks that have run up too high, or, to rebalance your portfolio. But do stay invested in your carefully built-up portfolio with trailing stop-losses, and sell when the stop-losses are hit.

If all you own are small-cap shares of questionable pedigree and management, then use this up move to sell out. When the correction comes - which it inevitably will at some point, make sure you use the cash to buy the L&Ts, and ITCs, and M&Ms, and Glaxos, and other such stalwart stocks. 

1 comment:

Eswar Santhosh said...

I feel the time is ripe for re-evaluation, not for excitement.

It will get exciting if market keeps steadily over 18K. Then, some select mid and small caps in my portfolio can offer exit excitement. A few large caps could offer partial profit excitement. Deploying that cash in accessible instruments waiting patiently for meaningful valuations or meaningful correction might initially offer some excitement. But all these are short lived. The only thing that offers real excitement is to vicariously enjoy other's excitement while remaining terribly unexcited about making the right decisions. Damn! this "investing" thing is always too boring - lot of waiting and only a few days / hours of action.