With the BSE Sensex and Nifty 50 indices dropping like bricks and shattering likely support levels, small investors are naturally anxious and bewildered by the quick turn of events. Both indices were near their all–time peaks just three months back. But a deadly cocktail of corruption and scams, generously mixed with untamed inflation and rising interest rates have left investors punch-drunk and chased FIIs to the exit doors.
In an earlier post, I had given 4 definitions of a bear market. So far, only definition number 2 has been satisfied, and definition 4 – the ‘death cross’ – may be satisfied soon. That will confirm a bear market. So what should investors do now? Use the correction to start buying, or wait for the correction to end?
Those are tough questions to answer – mainly because there are no simple answers that will satisfy all investors. Given below are 5 reasons why investors should start buying now, and 5 reasons why investors should wait. The idea is not to confuse, but to provide alternative arguments that investors can evaluate and then decide their own courses of action.
5 Reasons to buy now
1. The BSE Sensex and Nifty 50 indices touched their Oct ‘09 peaks. Since previous tops tend to provide support, a bounce up from current levels is a possibility. The technical indicators are looking oversold – also hinting at an upward bounce.
2. If you missed the rally from Mar ‘09 and had waited for a correction to enter, well you’ve got it. The indices are down 18% from their Nov ‘10 peak, and the downside seems limited. It is very difficult to time the market perfectly, so this is a good time to start accumulating.
3. You should invest when you have the money. It doesn’t matter if you have the cash to invest because you missed the rally, or because you were one of the smart ones who have been regularly booking profits. Many stocks are at or near their 52 week lows – even some good companies can be found in that group.
4. Inflation rate has shown the first signs of reducing. Whether it is the base effect or the effect of monetary tightening is some thing the economists can debate about. But a positive fall out for the stock markets could be that RBI may hold off on raising interest rates further.
5. The FIIs are selling, but not at the rate they did in 2008. It is more of profit booking in emerging markets and redeploying in developed markets because of valuation differences. With each passing day, Indian indices are falling and US and European indices are rising – progressively reducing the valuation gap. The Indian growth story is in tact. At some point, the FIIs will be back.
5 Reasons to wait
1. Volumes have been higher on down days than on up days. That means selling pressure hasn’t abated, and the up days have mostly been due to short covering rather than investment buying. That points to further selling.
2. If you missed the rally since Mar ‘09 because you waited for a correction, why not wait a little longer? No point trying to catch a falling knife. Let the selling subside. Once the indices start to turn around, that would be a better time to enter.
3. One of the four bear market definitions (mentioned above) have already been satisfied. If the ‘death cross’ happens, a bear market will get confirmed. Any subsequent upward bounces will be sold into, and the indices may drop much lower. How much lower? Check this post. Remember the old saying: The early bird catches the worm? Guess what happens to the early worm – it gets caught! Many small investors bought during May ‘08 during a bear market rally. They were badly ‘caught’ in the crash that followed.
4. The government is trying to show that it can also act against scams and corruption. But so far it has been too little – too late. Investor sentiments have gone for a toss, and no one wants to step up and buy. FIIs continue to sell. This isn’t the time to be brave.
5. FIIs have lots of choices about where to invest. China has been growing faster than India. But the Shanghai Composite index has been in a bear market for more than 3 years. There is no reason to believe that FIIs will pour in money like they did in 2009-10. India’s GDP growth rate is beginning to slow down. Investors may be better off by taking advantage of the higher interest rates and safer option of bank fixed deposits till the correction plays out and the bull rally resumes.
What would you like to do, dear reader? Are you in the ‘buy now’ camp or ‘let us wait out the correction’ camp and why? Your opinion may help other readers to decide.
