Trading Stocks @ All Time Highs

Every once in a while, the market does something so stupid it takes your breath away. ~ Jim Cramer

As the market trends into a clear sign of bulls thanks to the unabated inflows from Foreign Institutional Investors, every investor is caught in a catch-22 situation. Most of the domestic investors (retail/HNI) were anticipating a correction. Personally, I was hoping one and believed that a sense of reality sets in. But, contrary to everyone’s belief, markets started to test our disposition.

Till the run-up to the levels of 5600 in NIFTY, we’ve anticipated enough news flowing from the shores over the Bank stress tests and other EU economies’ debt woes to resurface and create an intermediary dip for all the hurt (Jan 2008) investors to participate, rather invest, for a long term rally. Like always, the markets have proved all wrong by creating a rally and likely to breach the earlier peaks.

So, more and more queries flood me daily on when to invest or not at these levels. And I’ve always maintained that there’s nothing called market timing but only time in the market, I believe still investors could make money. Sure, this week’s gonna be a defining one (like the 4th day’s play of 1st test b/w Ind & Aus of this test series), with markets likely to test their all-time HIGHS.

Now, to support these views I want you to consider some of the facts/sentiments:

           • We sure know, that the ‘stress test’ on banks revealed fewer skeletons than anticipated.

           • Don’t expect any further voluntary Sovereign debt default disclosures.

           • All the Govts are doing everything to delay any bad news.

           • The entire world wants to believe that we’re in safer situation than ever.

With this psychology running deep in entire sovereigns' DNA, the markets are exhibiting a merry-go-round streak currently.

As the sense and mood in the market changed to brash and bullish, people are ever more tempted to make fresh investments. Now, looking at the cues from the options market, the Oct 5900 Call rose by 154% in a single day’s transaction on 1st Oct. It clearly creates a sense of euphoria where the calls were earlier written @ 5600/5700 levels.

My logic however, always has been simple. We truly believe that stock markets have risk association. If we’ve to look @ 10% risk associated from 5600 levels it would mean a correction of 560 points on NIFTY which is 5140 levels. This is both quiet lower on the technical & fundamental valuations of NIFTY. So, when the run up started and reached 6000, I’d encountered quiet a large no of queries on withdrawing the investments exposed in Equities. I’d maintained profit-book instead of short at this point of time as my belief is that the markets have moved side ways for almost a year in a 5-7% band.

If we’ve to look at the premise of stock investments being risky then a correction @ 6K would reach us back to the levels we’ve enjoyed for a year; which means that enough risk has not been associated at these levels. So, to create enough returns (risk) the markets need to build in momentum and thus lure more investors in to the rally and then finally give in. This creates for a good rally to test the all time highs of the market (Jan’08 levels) and I believe we shouldn’t get scared at this proposition. But, DON'T expect a crash and correction as inviting as ’08 levels.

Also, always give credit to the appreciating value and so don’t expect the lower lows we’ve seen in the history and it also makes a point at looking newer highs on each of the stocks and the indices.

When coming to the picks, I would rather stick to the large cap (‘coz that’s where the money flows in) of Auto, Infra, Realty, Pharma, Banks and Metals/Commodities. You may hear some of these sectors have lost steam or already in the rally but pls hold on for a little more time before you go short. And moreover, don’t completely shy away from these at market highs as you might sell cheap to the foreigner – as the long term story of India is still quiet intact.

Only when the tide goes out do you discover who's been swimming naked. ~ Warren Buffett