About
Market Correction and more…Part-1
We were enticed to write
this article, by the feeling of amazement the investors were experiencing when
they see several stocks making yearly and new lows without making any noise!
They were amazed to see
their many of the hi-performer stocks that were analyst favorites and giving
them a kick n ride while the hay period of the markets and when it was anything
but green on the stock screens.
Correction is a word that
is known by all in the market.
You will see any ‘averagely
intelligent’ investor saying ‘he will buy in correction’ and that ‘he is
waiting’.
But that never happens.
Either he jumps at the last movement out of impatience or steers clear by fear
of further correction and aversion and pain of notional loss.
Basically, most investors
want their stock only to go up from their buy price. Otherwise they will not
invest! Or the market is not perfect then!
Why this does happens?
The fact is that they are
ignorant and un-knowledgeable. This might sound harsh. But we are not here to
please anybody!
Investors simply do not
understand when to stay in, when to wait for correction and when to jump in. We
will also emphasize the importance of ‘what’ in all these along with ‘how’.
Because ‘what’ is what the bottom-line come in the market.
Some of them may know
that correction is an opportunity (it is an all-together different subject how
to tell a transient correction and a beginning of bear phase. I said
‘beginning’, because as such the bear phase in its form is a boon to investors
for a 3 year horizon. We will discuss about it in other article.)
So, I believe there are
there always a bear phase and correction going on in market! How?
Let’s
understand it this way, there are 3 types of correction or bear phases. Any one
or more of them is always going on.
1. For the whole market,
which most of us are aware such corrections
The
following two might sound unfamiliar to you,
2. Correction for a particular sector, and
3. Correction in a particular stock
Yes, at any point of time
any one or more of the ‘correcting’ phenomena is going on.
Correction is a great
indicator of which sectors and stocks are weak or are going to underperform.
But to gauge that one has to analyze them under a certain span of period. One
has to understand the mini-phases of ups and down during a smaller duration
such as 3 month or in a year.
So now from where we
started speaking about the investors becoming amazed at the down-dip of their
stocks which were all fine until now before they saw some of them in a 52-year
low quote list or hearing negative news or may be the un-raveling of the facts
that their underlying fundamental no longer supports the stock price. They are
shocked how the bull market is not supporting their investment wisdom. Their so
called assumed ‘shield of bull-market’ is not over their stock. And they start
becoming loss-averse.
This results in a spiral
of other mistakes. Such as total exit from stock market. A negative attitude
towards investing. Averaging out in bad stocks. Start trading/speculating in
stocks and so on.
A loss of moral and
belief is bigger than loss of money.
We welcome, investors,
traders, academics and experts of investment and finance to contribute to such
articles and content which gives the right understanding to general investors
class. Because one can become a
successful investor by someone else’s knowledge for some years. But to sustain
it life-long and continue the journey forward one has to accumulate the gist
and ‘basic wisdom’ of investing. We say this and we endorse it.
Some practical points for investors,
·
A stock is never bad because it is making 52-week
lows
·
A stock is never good because it is making 52-week
highs
·
Similarly a stock does not qualify for buy or sell
for the same above reasons
·
Don’t invest by the classifications of the markets,
such as midcaps and small caps etc. Use and re-classify the market and its
constituents according to your objective and strategy of investment.
·
First analyze the ‘company’ and then the ‘stock’.
Once you know the company, and then many of them, you will have the knowledge
which is the right price to buy or to sell. Market will, then present a
bountiful of opportunities every now and then to you. But of course nothing can
be read out of a blank slate!
·
See it like these. The stock quotes are valuations
of units of ownership of businesses. They are affected by the working of the
company, the sector they are in it, the allied and connected sector, then the
geography they are working in, then comes the government policies. There are
more under each heads but these are for basic understanding.
·
Have you ever asked for intelligent question from
your advisor or analyst? Then do that. Don’t ask for tips and advice every now
and then. I will give you a tip how to judge a good advisor. Ask him about an
advice and if he tries to explain you the ‘how’ before the ‘what’ then he is a
person worth listening.
·
“Remember- the performance of your stock is not a
collective wisdom or effort of the whole market’. It is only dependent on that
particular company, along with the economic factors. And market is not ‘the
economy’. Yes it is said as ‘the barometer of economy’, but in fact ‘sometimes
extremely overstating’ sometimes extremely understating, while ‘stating nothing
at all’ at most of the rest of times!! It is not useful when a barometer is
used like a thermometer only when a ‘person’ becomes a ‘patient’!
·
Always remember that “Your investment return does
not depend on how your stock is performing at present, but on how it will
perform in future”
About
Market Correction and more…Part-2
Well, let’s start
by defining. To go further into anything which has attributes of understanding
we must define it. What is the meaning of correction?
We take it like
this. It says ‘correction’ literally meaning ‘something of a process or act of
correcting i.e. making it right which is or was hitherto wrong. But when we
apply this definition or meaning to word correction and its use in markets, we
do not see integrity.
Because the word is
used only for declines in prices and it is never used when prices are rising!
(This translates that when markets rise after falling on wrong note, it should
be called a correction!)
……This is
interesting with respect to how we want to understand the meaning. Mind it.
This is not a time pass or ‘intellectual jargon busting’. We believe this whole
contemplation will take us through the understanding of markets and its
behaviors…….
So when there is
any excess of increase in markets, it is ‘incorrect’ and need to decline i.e.
correct.
But as in
everything with the markets, correction is also not perfect or efficient or
which can be defined in perfect positive or negative correlations.
There are no
absolute and all-time uniform thumb rules market directions and same with this ‘correction’
component of market.
Take the case of
the ongoing post-Diwali declines in the markets (at the time of writing this
article). We have seen banking stock, which rose one way, declining up to 20%,
but that’s nothing. If the correction has to end with nifty around 5500, then
the contemporary heaters of markets such as banking and auto will continue to
shoot up to take markets to new highs of indices and heights of euphoric bull
sentiments. While the IT and cement pack from indices will give steadiness if
not contributing to rise. While pharma and fmcg likely to contribute where as
the other hitherto underperforming counters will at least come to their pre-Diwali
levels.
Looking for the
element and proportion of ‘consolidation’ element in any correction is
important. This helps us in figuring out how long the correction will last,
what sectors and stocks to trade in, and what would be the magnitude of the
correction.
Another thing also
to look into any correction is that it is one a ‘one day off’ or a couple of
weeks decline.
It should persist
through two derivatives expiry with zigzags and bouts of big rises with thin
volumes on the upside. We also see days during these on which individual
stocks/sectors get hammered or prepare to get hammered when markets are just
about steady. The next day likely follow with a 1-3% decline.
Ultimately, try to compare the
benchmark indices behavior in terms of declines and range of trading, with
several stocks and sectors as a whole as well. Because this is what give us the
overview of general condition of market trend.