5 mistakes small investors should avoid near a stock market top

The Indian stock market has been in a bull phase since Dec 2011. Nifty had touched a low of 4531 on Dec 20 ‘11, and rose to touch a lifetime high of 9119 on Mar 4 ‘15 – doubling in a little over 3 years.

Can the market rise even higher? Sure it can. Can it double again in the next 3 years? Anything is possible in the stock market – but the probability will be low because of the higher base.

So, expectations of making windfall gains should be moderated. Does that mean that there are no multibaggers left in the market? The market always provides opportunities – but investors need to be patient rather than chase after the ‘next Infosys’ or the ‘next L&T’.

Making huge gains is what motivates small investors to enter the stock market. But more important than making huge gains is preserving capital. The best way to do that is to avoid some common mistakes small investors make near a market top.

Here are five of them:

1. Looking at the Sensex and Nifty levels on a daily basis

Sensex and Nifty should be looked at for determining the long-term trend in the market. An easy way to do that is to look at an index chart with the 200 day EMA superimposed on it. A rising 200 day EMA with the index trading above it indicates a bull market. A falling 200 day EMA with the index trading below it represents a bear market.

Unless you own the 30 Sensex stocks or the 50 Nifty stocks, knowing the precise levels of Sensex and Nifty are not of much consequence and induces needless greed or fear. It is the performance of your portfolio that you need to monitor. Your asset allocation plan should tell you which assets you should buy or sell or hold.

Don’t have an asset allocation plan? Better make one – otherwise your investment decisions will be based on hearsay and gut-feel, which are sure tickets for disaster!

2. Selling in a panic if the market corrects 5-10%

There is a tendency for stock markets to correct when indices hit levels with several zeros in them, e.g. Sensex at 30000 or Nifty at 9000. Many traders (and investors) prefer to sell (or buy) at such levels. Note how call and put options are written at 7600 or 8800 – never at 7562 or 8793!

Corrections are part and parcel of a bull market. Corrections of 5-10% are quite common. These should be taken in stride, and in fact, welcomed as opportunities to add more. If you sell off in a panic, you may either miss the next leg of the up move, or re-enter at higher levels.

3. Getting swayed by economic and/or political news

Various economic and political news – which may or may not affect the stock market – flow into the market on a daily basis. Some companies win a few coal blocks in the auction – their stock prices go up. The IIP number is lower than expectations, the market falls.

The trick to avoid getting influenced by news is to realise that the effect of most news lasts 2 to 3 days at most. Things return to normal soon. It is the actual performance of the companies you own (yes, you own a small ‘share’ of the company whose stock you purchase) that matter over the longer term.

4. Buying ‘cheap’ stocks because the good stocks are ‘too expensive’

Regardless of when you enter the market, good stocks will typically trade at a premium. This is more so near a market top. If a stock is trading at a ‘cheap’ valuation, there is usually a very good reason for it to do so. Remember that ‘cheap’ stocks have a tendency to get even ‘cheaper’ – often just after you buy a large chunk of it!

If you are not an expert stock picker, and are confused about which stocks to buy during the ongoing correction in the market, choose a good diversified equity fund or a balanced fund. And keep investing your surplus savings in the fund regularly. After a few years, you will be amazed at the fortune you have generated with very little effort.

5. Holding on to your losers in the hope of getting back your ‘buy price’

If your portfolio has losers – don’t feel ashamed or blame your luck. Despite careful selection processes, stocks fail to perform as per expectations or lose money.

The big mistake – and this is perhaps the biggest cause of loss for most small investors – is to keep holding on to the losers in the hope of getting back your ‘buy price’. If a stock is losing money near a market top, it is unlikely it will ever make any money. Remember that the market doesn’t care about your ‘buy price’.

The best time to get rid of your losers is near a market top – when you may still find a buyer for them!

Stocks in the news this week (Mar 20, ‘14)

Every week a few stocks make headlines for various reasons. Investors often get excited or perturbed by a sudden spurt or crash in prices, and jump in to buy or sell. That is exactly what they should not do.

The trick to making money in the stock market is to remain unfazed by daily news flow. If you own or have been tracking a stock and suddenly see a price spurt or crash, by all means try to find out the reasons.

If you neither own nor track a stock, don’t get interested just because there is a sharp price fluctuation. Do your due diligence and then decide whether you should get interested at all. Investment opportunities arise regularly. You should make a considered decision whether to avail of such opportunities or not.

Here are the charts and brief analysis of a few stocks in the news this week.

Amtek India 

Like many auto ancilliary stocks, Amtek India has been struggling in a bear market. It is a profit making company with decent cash flows from operations but has huge debt on its books. The recent price spurt is on news of an acquisition in Germany. Technical indicators are looking overbought. A pullback towards its 200 day EMA is possible.

Eveready

Eveready has been in a bull rally since Sept ‘13, but the company is trading at a high valuation because of meagre profits. Daily technical indicators are showing negative divergences by failing to touch new highs with the stock’s price. News of a price hike caused a small price spurt.

Mukand

Mukand is a company that has long fallen from its glory days. It is making losses for the past few years and is in a bear market. Today’s price spurt is on news that promoters have hiked their stake from about 54% to 73% – post a recently concluded rights issue.

Polaris Fin

Polaris stock has been moving sideways with a slight upward bias. The sudden price spurt is on news of demerging its product business into a separate listed company. Technical indicators are looking overbought. A price correction should follow.

Will the H1/L1 US visa restrictions 'news' affect the IT sector?

A couple of months back, I had written a post about how to use financial news. Four categories of 'news' were discussed - good, great, bad and worse. Some suggestions about how to deal with such news were given.

What if there is a fifth category? Some item that appears in the pink papers or business channels as 'news' and causes some turmoil in the stock markets - but later turns out to be a misinterpretation? It wasn't really 'news'?

It is difficult to take any action till you receive further clarifications. Or, you may have an 'insider' in the industry or sector who can separate the wheat form the chaff and go to the core issue to advise you.

The recent 'news' about the H1/L1 visa restrictions for temporary non-immigrant workers in the USA is a case in point. The business channels went to town about it, asking leading members of the IT industry how these restrictions will affect their top lines and bottom lines.

Some retail investors dumped Infosys, TCS and other IT stocks. Some even stated that the leading IT sector stocks had become 'fundamentally weak'. The 'smart money' lapped up the stocks.

Any one who has spent a few years in the IT industry and has worked in the USA would take such 'news' in their stride. Because (s)he would know that similar 'news' keeps popping up every so often only to dissolve without a trace.

Why? Because the visa restriction 'news' was only a proposal by a couple of senators - pandering to the popular misconception that most of USA's unemployment problems have been caused by jobs being outsourced to India.

It takes a very long while - some times, forever - for such restrictive proposals to become a law. The proposal needs to be tabled and passed in the US Congress and the Senate. There will be a strong Indian-American lobby that will be working against it.

Even if the proposal gets through both houses, it is likely that there will be several amendments made to the original draft proposal. Each amendment will take its own sweet time to go through.

The US President has to sign the revised proposal to turn it into a 'law'. He has the authority to turn it down, or - you guessed it - seek more amendments. Many such proposals never get to become a law. Even if it does, most of the severe restrictions are likely to get diluted.

At the end of it all, should the visa restrictions become a law, it will not take effect retrospectively. Meaning, existing H1/L1 visa holders will not be affected. Only new visa applications made after the law comes into effect will face the restrictions.

Who might get affected the most in the IT sector? It will be the small body-shoppers whose business model is to hire out programmers to different US companies.

Also affected will be large US IT companies like Microsoft, Oracle, Cisco who employ significant numbers of H1/L1 software personnel from India. They will face difficulty in finding new employees from the US job market. So they will probably be lobbying the US government to veto such a restrictive proposal.

Infosys, TCS, Wipro have globally dispersed businesses, with a large portion of the work done 'offshore' in India. They will be inconvenienced, but the effect on their top line and bottom line will be very little.

Market news, Financial news - Feb 17, 2009

Rupee at two-week low as shares falter

MUMBAI (Reuters) - The rupee fell to its lowest in more than two weeks on Tuesday on expectations foreigners would dump more local shares, while a stronger dollar overseas also dampened sentiment.

At 10:15 a.m., the partially convertible rupee was at 49.08/09 per dollar, its lowest since Feb. 2, and 0.5 percent weaker than its Monday's close of 48.84/85.

"There are no inflows into stocks, the supply is also lower due the U.S. holiday yesterday," a senior dealer at a private bank said. "The emerging market currencies are also weaker."

Financial markets and banks in the United States were closed on Monday for the Presidents Day holiday.

Indian shares fell 2 percent early, extending losses after falling 3.4 percent on Monday in its biggest slide in two weeks, with a drop across world markets and a budget that had little to help industry hurting sentiment.

Foreign fund withdrawals from stocks this year have already reached around $965 million. In 2008, outflows of more than $13 billion had pushed the rupee down 19.1 percent.

Traders also tracked the dollar's performance against overseas currencies for direction. The dollar index, a gauge of the U.S. unit's performance against majors, was up more than 1 percent.

The euro fell to its lowest in more than two months against the dollar and tumbled against the yen on Tuesday, pressured by concerns about recession in eastern Europe and the knock-on effect on European banks.

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Nikkei falls to almost 3-mth low, exporters sold

TOKYO (Reuters) - Japan's Nikkei stock average fell 0.8 percent on Tuesday, hitting its lowest point in almost three months, with exporters such as Panasonic Corp slipping as the yen clawed slightly higher against the dollar. Chip-related shares that advanced last week, such as Advantest Corp, extended losses, but their slide was countered by continued gains for general contractors such as Obayashi Corp after a brokerage upgrade.

Honda Motor Co gained on solid demand for its Insight hybrid.

But most investors were focused on restructuring plans that General Motors Corp and Chrysler LLC are required to submit by Tuesday showing how they can be made viable after receiving $13.4 billion in emergency aid.

"Basically, everyone wants to see how this goes, with a failure to meet the deadline likely to lead to selling," said Yumi Nishimura, deputy general manager at the investment advisory section at Daiwa Securities SMBC.

"Although the possibility certainly exists that they may end up filing for bankruptcy, the market has not factored this in."

Though the Nikkei largely brushed off Monday data showing the Japanese economy's worst quarterly contraction in 35 years, sentiment is likely to remain subdued, market players said.

"There's no question that the environment remains quite grim, and this dark situation will be with us for a while," said Hiroichi Nishi, general manager at the equity division of Nikko Cordial Securities.

The benchmark Nikkei shed 64.02 points to 7,686.01 after earlier falling as far as 7,654.65, its lowest since November 21, 2008. The broader Topix shed 1.2 percent to 760.63.

The dollar edged down against the yen to 91.72 , pressuring exporters. Investors dislike a stronger yen as it eats into exporter profits when repatriated.

Canon Inc lost 2.1 percent to 2,365 yen and Panasonic shed 1.6 percent to 1,076 yen. Sony Corp fell 1.4 percent to 1,677 yen.

Advantest fell 2.4 percent to 1,319 yen and Tokyo Electron 2 percent to 3,410 yen. Kyocera Corp edged 0.4 percent lower to 5,740 yen.

But Honda climbed 0.7 percent to 2,215 yen after Japan's No.2 automaker said orders for the new Insight -- its first real attempt at selling gas-sipping hybrid cars in big volumes -- have exceeded 10,000 units since it unveiled the car earlier this month.

A Honda spokeswoman said the car's low price and fuel efficiency helped contribute to the solid demand.

Obayashi rose 3.9 percent to 428 yen and Shimizu Corp climbed 2.1 percent to 382 yen, extending gains made on Monday after Nomura Securities upgraded them to "buy" from "neutral."

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India fiscal deficit worrying, to review rating - S&P's

MUMBAI (Reuters) - Standard and Poor's plans to review India's domestic debt rating after the government's interim budget on Monday forecast increased borrowing and a higher fiscal deficit, a senior official at the rating agency said.

Rising outstanding federal debt and a worsening fiscal deficit outlook are worrying factors, Takahira Ogawa, a credit analyst at Standard & Poor's in Singapore told Reuters in a telephone interview.

"The federal debt as a percentage of GDP and the rising fiscal deficit are two significant factors which are constraining ratings and that is something which also may pull them lower," he said, after the budget was presented.

Acting Finance Minister Pranab Mukherjee said the fiscal deficit for the fiscal year ending March would be 6 percent, compared with a budgeted estimate of 2.5 percent. It expects 2009/10 fiscal deficit at 5.5 percent.

Standard and Poor's rates Asia's third-biggest economy's local currency rating at "BBB - minus", or the lowest investment-grade level, with a stable outlook.

Fitch has a similar rating but with a negative outlook while Moody's pegs it at one notch lower at speculative grade.

"We will review the ratings after the fresh announcement but there is no specific timeline for that," Ogawa said.

India's fiscal deficit is one of the highest in the world and two stimulus packages announced in recent months to shore up sagging growth have put pressure on finances while tax collections have slowed sharply.

Fitch said last week the government's total outstanding debt would reach 77.9 percent of GDP this year and said these levels were "outliers" among sovereign countries rated at the BBB level.

"While we understand the need for the government to take fiscal steps to boost the economy, India needs to take significant and widespread reforms to move towards fiscal discipline in the medium term for ratings to improve," Ogawa said.

(For comprehensive coverage of the interim budget please click http://in.reuters.com/news/globalcoverage/budget2009)