Tips to read a BSE Sensex rally correctly and optimize gains

However, since the last week of February, the Sensex has almost retraced most of its losses on the back of strong FPI flows.

Mar 24, 2019 11:03 IST India Infoline News Service

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With the Sensex back above the 38,000 mark, it is easy to be carried away by the euphoria. However, it needs to be remembered that in the last 6 months, the Sensex has gyrated in a big range. Post the IL&FS default, the Sensex did correct sharply on liquidity concerns, higher crude price and weak rupee. However, since the last week of February, the Sensex has almost retraced most of its losses on the back of strong FPI flows. Here is how you should be actually reading the Sensex so as to make meaningful trading decisions.
 
P/E ratios are normally right at a macro level
 
You may go wrong on P/E ratios at a stock specific level but if you consider P/E ratios at the level of Nifty or Sensex then you are rarely going to be wrong. Even as the Nifty and Sensex were trading at 26-27 P/E, the warnings of historical froth were always there. At these levels, it is more sensible to wait on the sidelines as you are likely to get lower entry points. Again, there is no point in selling out of quality stocks after they corrected 10% or after the P/E is down from 26X to 22X. If you combine P/E and P/BV of the index and compare with historical corrections, you will get a fairly good idea.
 
It is OK to miss a stock, don’t miss the learning
 
You always thought that Hindustan Unilever was a good buy last year at Rs900 but did nothing about it. You thought that Eicher was a good sell at Rs32,000 this year but did nothing about it. This happens to the best of traders when you don’t put in a trade despite your conviction. It is ok if the opportunity is lost but don’t miss the lesson. In both the cases, you must have had a fundamentally strong reason for your view. Just act on conviction!
 
Sell into vulnerability and buy into strength
 
There are some sectors that outperform the rally and then become vulnerable at higher levels. For example, auto may be looking vulnerable at higher levels after the revenue forecast downgrade. Similarly, the consumer story appears to be still intact despite the rally and the subsequent correction. Focus on the strength and the froth. As an investor, ensure that you are long on strength and short on weakness.
 
Bargains are healthy; more often than not!
 
A bargain sale for furniture, showpieces and other household items always attract interest. When you can look for bargains in goods, why not in stocks? Paradoxically, we try to get the best price for all products except for equities. If Reliance was good to buy at Rs1600 then it has to be better at Rs1200. That is the attic sale approach.
 
Be systematic rather than opportunistic
 
Investors tend to get carried away by the vagaries of the market once too often. For example, if you had invested in the Sensex in 1981 at 100, it would have appreciated 380 fold in the last 37 years. That is an annualized return of 16.50% without considering dividend yields. Don’t try to get too opportunistic in the market. There is a lot of money to be made in stock markets with a disciplined and systematic approach. Timing the bottoms and tops may sound quite exciting, but beyond that it amounts to precious little.
 
Watch out for the FPI selling build up
 
One cue that rarely fails you in the stock market is the trends in FPI selling. Foreign portfolio sellers are active in equity and in debt. When you find FPIs selling aggressively in equity and in debt, then it is time to be cautious because it means a negative view on the India story. That is the time to sell and wait in the sidelines. In the first 2 weeks of October, FPIs sold nearly Rs26,600cr of which Rs18,000cr was sold in equity and Rs8,600cr in debt. But in the four weeks from February 20th, FIIs pumped in Rs35,000cr in equity. If you look back, the Sensex has exactly moved in tandem. Watch out for the FPI signals to track turnarounds.
 
Profiting from the Sensex movements is nothing like rocket science. If you adopt a systematic approach, it is possible to play market movements a lot more smartly. 

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