Skip to main content

How to time the stock market?



There are several techniques to time the entry and exits. Let us discuss the broader parameters here and leave the complex ones for forthcoming issues.

For passive investors:

For investors unable to track the markets regularly, the best way to time the market is through what is called automatic rebalancing--having a proper asset allocation and sticking to it by rebalancing the portfolio regularly. Let us say you started investing in the beginning of 2008 with a 50% exposure in equity and 50% in debt. By the end of 2008, the equity portion fell by 50% (ie gone down from 50 to 25, while the debt has generated a return of 8% (ie gone up from 50 to 54), tilting your asset allocation in favour of debt. That warrants a rebalancing (i.e., moving back 15% from debt to equity). Likewise, the stock market rally in 2009 and 2010 made certain that your equity portion went past the 50% mark, necessitating a partial profit-booking and diverting it to debt.


   Tweak the asset allocation depending on market valuation. The equity portions of the portfolio can be modified a little based on the overall market valuations. When following this strategy, the equity component of the portfolio will be defined as a range (say, 40%- 60%) instead of a specific percentage (50%). In the above example, the equity component can be increased to 60% if the Sensex P/E drops much below the historical average and is brought down to 40% if it goes much beyond the historical average. (See box on PE as investing signal)


For active investors:

Active investors who track the market regular can be classified into two types—those who believe in fundamentals of a stock and those who also look at the technical factors. Should fundamental investors ignore all market fluctuations? "No," says Warren Buffett, the legendary value investor. "Look at market fluctuations as your friend rather than your enemy; profit from market's folly rather than participate in it," he says.


   The investment decision has to be directly linked to the valuation of stock (if you are investing in one stock) or valuation of the broader market (if you happen to have a diversified portfolio). The strategy is simple—make sure that the value you get is much more than the price you pay. There are several methods to arrive at the value of a stock such as the earning discount model, dividend discount model and discounted cash flow (DCF).


   Investors also must compare the valuation of stocks by comparative valuation tools such as price-to-earnings ratio (P/E), price-to-book ratio (P/B), dividend yield, P/E-to-growth ratio (PEG), etc. We will explain these in forthcoming issues.


   The decisions to be either 'in' or 'out' of the market themselves centre on timing, investors should take a call about the broader market valuation here. If you are a high risk-taker and ready to be in/out of the market for a reasonable period, you can use market valuations to balance your equity portfolio. The strategy here is to totally exit the market if valuations reach unsustainable levels.


   How to arrive at broader market valuations? The best strategy is to calculate the forward P/E (i.e., value of the broader market index like Sensex by its estimated forward earnings). As a retail investor, it will be a difficult task.


   Several brokerage houses and wealth managers offer this service and use their own assessment about market valuations to arrive at the required asset allocation. If you are doing it yourself, you can use the Sensex trailing P/E, which is calculated and is available in most financial papers and websites.


   As is clear from the Sensex P/E box, the Sensex trailing P/E was moving in the range of 12 to 28 in the past 15 years. It can also be seen that the market went into a deeper correction once the valuation crossed the 28 mark — the same can be used as an exit point.


   For 'technical' investors, technical analysis is a useful tool to time entry and exit. Since prices may move up or down 15% to 20% due to technical factors alone (i.e., without any change in fundamentals), use of technical analysis to decide the exact entry is useful.


   Technical analysis is based on a historical study of market data like price, volume and market breadth. The most widely-used tools for selecting the entry timings are moving average crossover (i.e., price going above a rising moving average or short-term moving average going above long-term moving average), price going above a falling trend line, prices bouncing back from a support, patterns like double bottom (i.e., prices coming to a specific level twice with a reasonable time gap in between), inverted head and shoulders (the pattern looks like a man standing on his head), rounding bottom (like a saucer). The opposite action will result in timing the exit.

Popular posts from this blog

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...

Avoid NFOs

  Don't get taken in by the flurry of new fund offers. You will be better off sticking to the tried and tested schemes.   For the past one year, to cash in on the bull run in equities, mutual fund houses have gone on a new fund offer (NFO) overdrive. But experts are unanimous in their advice: avoid NFOs . While past performance is not an indicator of how a fund will fare in the future, it does tell the investor how skilful the fund manager is. This crucial information is missing in an NFO. Not only is there no track record to judge an NFO by, many NFOs are similar to funds that already exist. If the new fund is similar to existing funds, you are better off investing in the latter. Around 67% of the new launches in 2014 were closed-end products. Investing in the NFO of a closed-end fund is doubly risky. In case the fund's performance is lacklustre, a closed-end fund does not allow you to exit. Even though closed-end funds are listed on the stock...

Franklin India High Growth Companies Fund

Franklin India High Growth Companies Fund Online One of the key developments that the Street is keenly waiting for is a cut in interest rates by Reserve Bank of India . With demand rising gradually, a rate cut is expected to boost earnings growth for companies. In such a situation, schemes which invest in high growth companies are best suited, especially when seen from a long-term perspective. One such scheme is Franklin India High Growth Companies Fund. Fund managers Anand Radhakrishnan, Roshi Jain and Srikesh Nair strictly follow valuation parameters when it comes to choosing stocks.Valuation parameters, such as enterprise value, price-to-earnings growth ratio, forward price-to-sales ratio and discounted earnings per share, play a critical role in selecting companies for investments. Taking into account these parameters, the fund managers invest in companies which are poised for high growth in their respective sectors. This approach has been in favour of the scheme and it has perform...

Debt Mutual Fund Dividends are Taxable

DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.   The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...

Shift from Debt to Equity - Arbitrage Funds

   In addition to generating returns comparable with debt options, arbitrage funds also enjoy the tax advantage of equity funds.   Arbitrage fund investors had been worried about the category being clubbed under non equity funds in the recent Budget. As this did not happen, there is relief among them as they can continue to enjoy tax benefits. Arbitrage funds cash in on the opportunities that exist between the spot and the futures market. They pair trade--buy in the spot or cash market, while simultaneously locking-in a higher price for the same in the futures market. They pocket the difference when the sale actually happens. Their risk profile is very low--comparable to short term debt funds . Fund managers try to maintain their equity holdings in the cash market above the 65% mark, so that these schemes are classified as equity funds. Equity funds do not incur capital gains tax if held for more than one year and, if held for less than a year, sho...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now