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Some indicators that point to a stock market correction

It is not easy to predict the market direction. But in order to maximise returns, it is important to buy the right stock at the right price and sell it at the right time. Investors always ask the question - is this time to sell or should I hold it for some more time? These are a subset of symptoms that can indicate a possible correction in the near term. Investors can start taking profits (or part profits) when one or more of these symptoms show up in the market.
  • Stretched valuation

Market valuation is the sum of individual stocks valuation. Valuation of stock is derived from its expected future performance. In a bull market, stocks have a tendency to surpass the true valuation. When a lot of stocks go way beyond their true valuation, the market looks over-valued and signals a correction.

  • Global events

Global events have direct or indirect impact on stock markets. Things like rising of crude oil prices, metal prices, and fall in the global markets can trigger a fall in the local stock markets. This is one of the prime reasons for some corrections that we saw in our markets.

  • Liquidity signals

Liquidity increases the risk appetite in the market and as a result pushes the market up. Therefore, any signals that indicate tightening of liquidity (actions of US FED, Japanese Central Bank, RBI actions etc) may lead to a fall in the stock markets.

  • Government actions

The government is the policy maker in a country. Therefore, stability of the government, new policies or changes in the existing policies is very closely tracked by the stock market. Budget announcement by the government is very closely followed by the stock markets. Any bad news on this front can trigger a sell-off in the market.

  • Technical indicators

Technical analysts study various chart patterns (head and shoulders, ascending wedge, moving averages, relative strength analysis etc) and track many other market parameters (put-call ratio, day trading volume etc) to predict market directions. The study of these indicators is quite exhaustive and tedious, and is not very easy for the retail investors to follow. Retail investors can read these views as one of the parameters they track in the market.

However, the happening of one or more of these factors does not guarantee a fall in the stock markets and investors should not try to time the market. They should invest in the market with well thought-out strategies.

These are some tried and tested strategies:

• Invest with a long-term horizon. It is not advisable for investors to trade in the market for short-term gains
• Do not invest blindly in stock markets. Analyse your investments and always maintain a profit/loss target on your investment. Take partial or full profits/losses in case your targets are triggered
• Since the stock markets are quite volatile, keep a constant eye on your investments. If you cannot track your market investments, you will be better off keeping your money in bank fixed deposits or mutual funds
• Look for diversification of investments. Do not invest in one market instrument
• Analyse your risk profile and accordingly invest in proper proportions into various instruments (stocks, equity and debt mutual funds, bank fixed deposits etc)

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