When to buy a stock and when to sell it?
Finding a stock can often be easy for investors, but deciding when to buy or sell it can be difficult for them.
Let us first look at the recent past.
Nine months ago, the markets started to rise, after better than expected results in the second quarter. (September 2020). Valuations had become very attractive and huge cash started to drive blue stocks due to low interest rates. The first wave of COVID took everyone by surprise. Government, healthcare workers, citizens and industry. The response was brutal. The resulting foreclosure crippled the economy.
After conquering the first wave, everyone relaxed. The second wave was another surprise. However, in the last 4 months from February 21 to May 21-June (the market hit a new high around February 15 and then refused to move up), it was easy enough to make the argument that the market n he is in no mood to take second place in COVID. seriously vague. The first wave was an unknown devil and the markets panicked. However, the second attack was the known devil.
We were able to fight it through vaccination (which had already started) and social distancing. While authorities were a little lax in tackling Wave 2 initially, they are much better prepared now, for Wave 3 if and when it does occur. In the second wave, even though the number of cases crossed 400k in our country, the market did not collapse, it just consolidated and was limited to the range. This was because the lockdown was localized and not national.
The budget day low was not violated. Sector rotation was observed with the information technology, pharmaceuticals, consumer goods, specialty chemicals and insurance sectors, which continued to perform well on a work-study basis. As the second wave of COVID subsided and the number of active cases declined, markets surged to a new all-time high. The skeptics who waited for the crash to happen and the market to hit 40,000 Sensex and 11,000 Nifty levels; now predict 75,000 Sensex and 20,000 Nifty in a year. However, there is always a worry when every market participant turns bullish.
So let’s ask the question: when to buy or sell stocks?
Let’s see the logic first: Why it’s a good time to sell:
1. It is always prudent to recognize profit in the market. The age-old saying, strike when the iron is hot. No one went bankrupt and made a profit. If not now when?
2. Penny stocks started to rise like Jack’s bean stock. No action can endure a meteoric vertical ascent. The crash is imminent. This has always happened in the past. It can happen now! The retail investor normally starts chasing stocks that are low and get hot with each bull run. Each penny stock is considered a future multi-bagger (sic!). The simple logic that the retail investor follows is confirmation bias.
If there is a top channel to stock and more than 5-10 lakh buyers are waiting to get the shares, the retailer concludes that it must be worth buying. Normally, stock is not available until “someone” wants to offer delivery. Once this distribution is made, the stock stagnates for the next few months.
I’ll give you a simple example among many. Suzlon (Nothing against the stock, except their problems are not over yet) – the stock first hit the upper circuit in this bull run on December 11, 2020 at 3.85 and then continued to hit the upper circuits to hit Rs 8.45 on January 8, 2021, when it hit the upper and lower circuits. Until June 16, even after 5 months, this high was not broken.
3. The first red flag in the running of the bulls took place on June 14 following a tweet from Sucheta Dalal about something fishy going on in an industrial group. The market linked this with shares of the Adani group which had seen an exponential rise over the past year. Stocks continue to collapse. This has to be the first notch in the relentless bull run. More stories like this could follow.
4. Crude oil is on the rise and has crossed the $ 70 a barrel mark. Every “economist” knows that India, as a country, suffers the most when oil prices are high, as this can fuel inflation. Moreover, the government is not in the mood to cut fuel taxes even though the price is close to triple digits.
5. If not now, but by the end of the year, inflation will weigh heavily on the economy. It can become difficult for the RBI to maintain interest rates. If interest rates rise, stock prices and markets may not hold up.
6. In all cases, small caps hit their previous highs of 2017-18 and many stocks hit multi-year highs. The hunt for stocks in some sectors has outstripped their fundamentals. Valuations would only be sustainable if earnings growth and backlog hold or move away from these levels.
7. Even though the Fed has promised to hold rates until 2023, the position is becoming more hawkish than before. Inflation is already on the rise in the United States and in the process, bond yields are gradually increasing.
8. Commodity prices have peaked, spoiling the profitability movement of most consuming industries. The entire consumer basket, including agricultural commodities and metals, has increased. Unless higher prices are passed on to consumers, profitability will decline. Whether there is sufficient demand to pass on the price increase is a questionable issue.
All of the above reasons can force a borderline pessimist to sell their entire property. However, is this the right action to take? Let’s explore.
Let’s see why buy at this level or at least stay the course on your stocks.
1. COVID numbers are dropping and the lockdown is over. If this was one of the reasons for the economy to stagnate, openness will give a boost to many sectors like hospitality, airlines, construction, consumer and consumer discretionary. Thus, other sectors are likely to pass the baton.
2. The world markets are very strong and give life to our markets. Thanks to the enormous liquidity poured into the world economy by the FED, the Japanese and the European nations, the dynamism continues.
3. Interest rates in the United States gradually increase, but remain low. They fluctuate between 1.55 and 1.6%. Bond yields in Europe are negative. This has fueled all the speculative markets which include commodities including gold, silver, iron and steel, non-ferrous metals and of course stocks.
4. The entire equity market has gained tremendous momentum. As it is quite normal to get small corrections when the markets reach new all-time highs every day, the underlying uptrend becomes stronger. The bullish race can therefore continue.
5. Quarterly results for 2 out of 3 companies that are relevant, better than expected or in line with expectations. Even though there are skeptics who believe that the results for the first quarter of the current year may not be very encouraging, the market believes the industry will still perform well due to innovation, reduction of costs and pent-up demand in many sectors.
6. The GST figures have been robust and have consistently exceeded Rs one lakh crore in recent months.
7. To top it off, all advance tax collections and all direct tax collections have increased by 100% this year. This is a direct indication that the coming year will be a banner year.
8. Rural India has enjoyed sufficient rains over the past two years. The harvests were robust and the water reserves more than sufficient. Even the current year’s monsoon forecast has been robust at 100 percent of normal. To add to sentiment, the government has raised support prices for all crops to the tune of around 5 percent. As if that wasn’t enough, agricultural commodities around the world are still high, leaving enough room for exports. This bodes well for rural industries.
9. There is no point fighting the markets or fighting the uptrend, just because you are unable to digest the same. Industries like steel have emerged from a multi-year cycle of decline. The Indian Pharmaceuticals, APIs and Specialty Chemicals space has a unique blend of capacity and capacity expansion with quality sourcing trustworthy to the international community versus the trust gap with China.
In conclusion, we can summarize as follows:
1. The running of the bulls is not yet over. Barring minor setbacks, the stock markets have a very high probability of advancing more in line with GDP projections as transactions normalize.
2. The banking sector is not yet out of the woods. Private banks like ICICI, Axis, HDFC bank (even the smallest RBL) have raised capital through QIP and are aggressively arranging bad loans. Public sector banks are merging and with government support and technology adoption they would be ready to meet the rural challenge. The government-initiated Kisan credit card program will be an essential tool to further spice up the rural economy.
3. Once the banking sector joins the bullish movement, a new multi-year high could be around the corner.
4. However, it may be prudent to recognize profit selectively on small and mid-cap stocks. The least you can do is not make new purchases in stocks with unsustainable valuations without proper analysis. (In the space of small caps)
5. There are many opportunities in the market which are still investable. A wise investor can locate them and put his money in them. The history of gas, the history of specialty chemicals, the history of fintech and the digital revolution are still intact.
6. The simplest solution is asset allocation. Profits should be recognized periodically and locked in fixed income securities to protect against possible declines.
7. Highly speculative stocks should be sold if decent profits have been made. Keeping them further in profit or loss depends on your risk appetite and your deep pocket.
8. There are new stories and stories being introduced by “interested neighborhoods” on social media. These present new arguments for buying the failed stocks in order to attract the gullible retail investor. It will be more careful to stay away from temptation. 10,000 shares bought at Rs 3 in a worthless share is another Rs 30,000 lost.
The author, Bhushan Mahajan, is the founder and CEO of Arthbodh Shares and Investment Pvt. Ltd. Opinions expressed are personal