Saturday, September 29, 2012

Should we buy stocks now?

Being a consultant and investor I am facing a very genuine question these days by almost 90% of the investors I meet and that question is "I missed the rally, should I buy stocks now?" Well the feeling of being left out is very painful sometimes even more than loosing money on stocks. The straight forward answer I give them, without citing too much of reasons, is a big No. The reasons are many and cannot be explained verbally in couple of minutes. So I decided to pen them down in this post.

1. FIIs continue to put money while DIIs continue to pull. FIIs were net buyers to the tune of around 20,000 crore while DIIs were net sellers to the tune of 8500 crore in the month of September alone. FII money are short term money and driven by global factors which could start reversing in case of any bad global economic news and then there will be no buyers to support the selling pressure till it reaches an attractive level where DIIs start putting money backs into the markets.The Indian stock markets have become purely FII driven market since last few months which is not a very sound situation for our markets.

2. Recent policy actions in India has been taken by the markets very positively ignoring the risk of implementation.

3. October is historically a weak month and considering the recent run-up in the markets we could see a correction this month. Technically the Nifty on the weekly chart has formed a Doji candlestick pattern signifying some signs of pause in the intermediate uptrend.

4. The rally has mostly occurred in stocks which had very high amount of short positions built in last couple of months. Above that FIIs have made more than 15% return in the month of September alone considering the appreciation in Indian Rupee and Stocks. This is very high amount of return in very short period of time which could lead to profit booking at current levels.

So all in all, even if market goes up from this level there is not much upside expected and the risk reward ratio is not in the favor of investing at current levels. So fresh investment should be avoided at current levels and one should wait for this bout of euphoria to settle before taking fresh positions. 

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