Mayhem in the Market: What Should You Do?

saturday-article_MarketSmithIndia

This week has been a rather strange one for the investors. The Nifty registered a new closing high on Monday. As a result, we moved the market status from Uptrend Under Pressure to Confirmed Uptrend at the end of the session. Continuing with the positive momentum, the index scaled a fresh all-time peak in Tuesday’s session. However, the euphoria ebbed soon after, as the index ended the day with minuscule losses on Tuesday. The next three sessions, too, have not given anything to cheer for the bulls as the index ended in the negative territory, with today’s market action being particularly disappointing.

This situation puts the investors in a conundrum, as to what should be the further course of action on the stocks in their portfolio. Emotions can run high during these times. Some may feel it’s time to sell their stocks and enjoy the gains as the market has hit new highs. Others may become greedy and seek to further increase their returns by staying invested for long.

The market is still in Confirmed Uptrend; this gives the green light to go ahead and buy stocks, provided they score well on fundamental and technical characteristics. But what to do with the stocks which are already there in the portfolio, which are witnessing volatility on account of the turbulence in the market?

This is where our sell rules come in handy for investors. A rules-based investing system like CAN SLIM will help you stay calm and act rationally without giving in to emotions. Our research over the years has shown that winning stocks rarely fall more than 8% below their correct breakout point. So, if you have a stock that corrects further, chances are that the stock does not possess the characteristics of a winning stock in the current market scenario. Sell the stock if it falls 8% below the ideal buy point. This sell rule ensures that you will never take a big loss on a position. Further, you should not hesitate to exit a counter if it has breached a key support level such as the 50-DMA or 200-DMA on heavy volume. At the same time, if a stock holds up well during a market downturn, not declining significantly, you can hold the stock, since such stocks tend to inch up swiftly as the market rally resumes.

We will look at two stocks and how we dealt with them differently, during the market downturn following the demonetization exercise announced by the government.

To continue reading, Buy Premium Access