The stock markets have touched a 31-month high, fuelled by strong buying support from domestic and foreign institutional investors (FIIs). Analysts have been expecting a consolidation since the last few weeks as the first quarter results remained below expectations. Global cues are also looking weak. The jobless claims are rising in the US and have touched their highest levels of this year.
There are signals that the economic growth in developed countries is slowing down and the second half of the year will have a lower growth rate than the first half of the year had. There is a possibility that some countries might slip into recession again too.
However, on the positive side, the domestic economy is doing pretty well and is expected to have a healthy growth of around nine percent this year. The strong growth story is attracting investors from around the globe, and these inflows are driving the markets up.
The sentiments and undertone are quite bullish in the markets, and it won't be a surprise if the markets scale another 5-7 percent in the short term. The markets have a general tendency to overlook negative news during a bullish phase and keep touching new highs. However, it is advisable for investors to stay patient and wait for a correction to make new investments in the markets.
In general, a broad strategy for investors with a medium or high risk appetite should be 'buy on dips and sell in rally'. Since the markets have rallied significantly in the last few weeks, its time to keep booking profits at every upward move and keep a significant portion of the portfolio in cash.
Here are some strategies to take some profits off the table while keeping a handle on the possibility of further gains if the markets move up more:
Track performance of sectors
Investors should continuously look for signals from various sources to get a sense of sectoral performance, and make necessary modifications to their equity portfolios. Sometimes, the results clearly indicate the business conditions and challenges, that give investors a clear-cut sell signal.
At other times, investors should investigate to figure out the way forward from the results numbers, management interviews and analysts' views etc. It is advisable to exit from under-performing stocks and sectors during a market rally phase, and invest in sectors with a better outlook during a correction phase.
Book profits regularly
It is not possible to predict market peaks and bottoms. Therefore, it is advisable to keep booking profits regularly, whenever the prices move significantly. Investors can set milestones to book profits for their positions in the markets. Regular selling and booking profits enable investors to average-out the opportunities, and use them in a systematic manner.
Blue-chip safer
The stock markets are at a 30-month high level, and it's advisable to exercise caution and reduce exposure to risky instruments (smallcap and mid-cap stocks). Investors willing to stay invested in the markets should stick to blue-chip and large-cap companies which have relatively lower downside risks if the markets correct.
It is important to keep emotions aside while taking decisions related to investments. Sometimes, in case of bad investments, it is wise to make a loss-exit and take a hit on the investment's principal amount rather than staying stuck with the stock. This hard move enables one to protect the capital which can be re-invested in stocks or instruments with better prospects of growth, rather than staying invested and lose the capital in a bad investment.
