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

ICICI Prudential Dynamic Plan Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...

Lump Sum or SIP?

Invest Mutual Fund Online     You have a lump sum in hand and you wish to invest in equity funds. However, you have heard a lot of talk about investing in equity funds through Systematic Investment Plans (SIPs) because they help average costs, ensure you do not ill-time the market, and help you invest in small sums, besides giving you many other advantages. So, should you invest the money you have in hand in one go, or let it remain in your bank account and then do an SIP? There is no harm in investing a lump sum amount. For all you know, compounding, over the long term, could work better with lump sum. However, make sure you fulfill all of these three criteria if you want to invest in one go. Else, SIP is the way to go. #1: You invest for the long term According to past data, ideally, if you have a time frame of 12 years or more, you can consider lump sum investing (provided you satisfy the other two conditions that follow). So, what is the sanctity behind 12 years? Is it because only...

ICICI Lombard to provide weather cover in 10 states

ICICI Lombard General Insurance Company has been given the mandate to provide weather-based crop insurance for rabi season (2010-11) in Madhya Pradesh, Bihar,Tamil Nadu, Karnataka, West Bengal, Chhattisgarh, Jharkhand and Himachal Pradesh.    The insurance company will cover 69 districts — 30 loanee districts (farmers who have taken loans) and 39 non-loanee districts. The major crops that ICICI Lombard covers for the season are winter paddy, cotton, wheat, mustard, barley, maize, onion, potato, tomato, lentil, peas, arhar, jowar, fenugreek, coriander, cumin, methi, isabgol, brinjal among other crops.    Weather-based crop insurance provides cover against weather-related risks such as excess or deficit rainfall, variations in temperature and fluctuations in humidity. This scheme facilitates immediate compensation based on certified data collected from independent third party bodies such as Indian Meteorological Department ( IMD ) and National Collateral Management Services Ltd. ( NC...

Mutual Fund Review: Reliance Regular Savings Balanced

Reliance Regular Savings Balanced fund has shown great resilience during market crash After a shaky start, this fund has established itself as a strong contender in this space. In the past three years it has ridden the market well by not only delivering during the market run-ups but also displaying resilience during the crash. In 2008, it witnessed the second lowest fall among its category and last year it was amongst the top three performers with a return of 76 per cent (category average: 61%).   The poor underperformance in 2006 can well be credited to the low equity allocation of the fund, which stood at just over 10 per cent for only four months that year. Though the fund has the leeway to go up to 75 per cent in equity, it has never touched that limit. In fact, it has exceeded 70 per cent in just five months in its entire history. During the crash of 2008, the fund managers had no problem going right down to 54 per cent (equity exposure). Fund managers Omprakash Kukian and A...

ICICI Prudential Mutual Fund Dividend

ICICI Prudential Mutual Fund   has announced dividend under the following schemes: Scheme Dividend (Rs/unit) ICICI Pru FMP Series 72 370D Plan G-D 0.03611325 ICICI Pru FMP Series 72 370D Plan G Direct-D 0.03611325 The record date has been fixed as February 15, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave your comment with mail ID and we will answer them OR You can write to us at I...
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