When Amazon announces 'Big Billion Day' sale we get super excited, start looking for offers and short list products which we want to buy.Stock market is a different ball game. Here people lose sleep whenever there is steep fall (Big Billion sale !!). That's because our money is invested and we see it going down in value. People feel the pain of loss twice as strongly as they feel pleasure at an equal gain. Human brain starts equating it to loss in purchasing power. e.g. If portfolio value is down by 2 lakh people think they missed out on an International holiday !
Now best thing we should do when market starts falling is to think rationally. But hey, it's human brain and it gets swayed by emotions or what we call in investing paralance as 'Behavioral bias' Corrections and bear markets are part of life of an equity investor. There isn't much you can do to avoid it. If you look at markets for last 30-40 years, we experience 10-20% decline atleast once every 12-18 months and 50% type falls happen once every 8-10 years. So if you want take advantage of these 10-20% type corrections, you need to establish a systematic process. This process driven approach helps removal of investing biases which otherwise resist you from investing rationally. Understand structure of market By structure I mean how the market has been performing over a period of 1/2/3/5 years. Why is this important ? Because if it is a bull market that is couple of years old and has started after a severe bear market, then chances of another bear market are very low. This currently is a US led bull market which has begun since 2009. So it is a 11 year old bull market. Well then a bear market might be around the corner. But thats what the experts said in 2011, 2013, 2016, 2018 & 2019 as well !!
Now best thing we should do when market starts falling is to think rationally. But hey, it's human brain and it gets swayed by emotions or what we call in investing paralance as 'Behavioral bias' Corrections and bear markets are part of life of an equity investor. There isn't much you can do to avoid it. If you look at markets for last 30-40 years, we experience 10-20% decline atleast once every 12-18 months and 50% type falls happen once every 8-10 years. So if you want take advantage of these 10-20% type corrections, you need to establish a systematic process. This process driven approach helps removal of investing biases which otherwise resist you from investing rationally. Understand structure of market By structure I mean how the market has been performing over a period of 1/2/3/5 years. Why is this important ? Because if it is a bull market that is couple of years old and has started after a severe bear market, then chances of another bear market are very low. This currently is a US led bull market which has begun since 2009. So it is a 11 year old bull market. Well then a bear market might be around the corner. But thats what the experts said in 2011, 2013, 2016, 2018 & 2019 as well !!
Key levels of market
You should track key levels of market which has acted as resistance and support in past few years/months. This will ensure you don't sell of stocks after a steep correction when market are at supports or increase your exposure to stocks when market is at a significant resistance.
Currently key level for SPX 500 is around 3100. Market needs to stay above this level to rise further. Look at how the bulls & bears are fighting to stay above this level
Now lets look at Nifty charts.
Nifty has respected 100 weekly moving average in last 3 corrections and has bottomed out around this region. This level is around 11000 currently and should act as a strong support.
Today as well Nifty fell to 10800 levels but closed around 11000 levels.
Sep 2019 tax cut was a reforming event in Indian capitalist history, something like 1991 reforms. The base formed there in my opinion is very significant.
Similar to SPX, the trendline for Nifty shows support around 10300 levels.
And finally the big one, 200 moving average on weekly charts.
Nifty hasn't broken 200 weekly moving average since 2008. It broke this average only once since 2003 i.e. in 2008 crash. Currently this level is around 10000 for Nifty. In my humble opinion, this level is 'Throw in the towel' level for Nifty below which the current bull market will be seriously challenged.
So to summarize, there are multiple supports from 11000 - 10000 which Nifty should respect and one should keep them in mind while making any buy or sell decision.
Your high conviction ideas
Suppose you have 10 stock portfolio. Out of this may be 5 are your top conviction bets where you understand the business dynamics well. i.e. you have the conviction to hold. Next 5 are ones which you have some understanding but have bought because someone you strongly follow has convinced you to buy. i.e. you have borrowed conviction.
During market panics, you should think of reducing your low conviction ideas and deploy that capital to high conviction ideas. How does that help ? This helps you stay calm knowing that the stock prices will bounce back. You can then also think of deploying new capital.
Key support levels for your portfolio stocks and identifying strong stocks
Like you should keep a note of key level of market, you should also keep a tab on key levels for your portfolio stocks. Why ? Because all stocks don't bottom at the same point in time. So knowing key levels supports (trend line, moving average, etc.) for your stock does help a lot. This is something I had covered in my earlier post, you can read it here.
Periods of draw-down are very difficult if you are not able to detach your emotions. Process driven approach is something will always help you rather than acting according to your gut feeling. Don't be afraid of taking a loss if your process says so, because human mind is always loss averse & it makes one sell the winners & hold onto the losers.
And last but not least, don't panic due to volatility. Market climbs up using stairs and comes down using an elevator. Get used to days with Index falling 3-5%
Disclosure: I am not a SEBI registered investment advisor. The content in this blog are academic in nature, please consult your investment advisor before taking any investment decision; I may have position in stocks discussed on the blog
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