Buy Good Stocks On DipsFriday, June 8, 2012 23:43
It’s been a long while since I have written on the blog. Meanwhile for quite a lot of time markets traded in a tight range above 5200 before suddenly dipping below those important technical levels to hit 4800 or below levels again. Much of that was because of the massive depreciation in our currency which directly points to our macro concerns. My views were still the same and even today I stand by them – buy good stocks on dips. Markets are giving great opportunities for medium term investors who want to invest at lower levels and sell on rallies in the markets. We have been getting these opportunities once in every few months where an investor can make 20% or more in a couple of months time frame.
What is going on in the market today?
The markets formed a base around 4800 and kept retesting those levels again and again before finally moving up. Markets were facing some kind of resistance around 4950 -5000 levels which it finally broke out recently and is on it’s way to test 5100 next week unless we get some negative surprises. I won’t be surprised if markets actually test 5200 as well, considering we don’t get any negative news from Inflation, IIP or global front.
The markets recently have been moving up sharply largely because of the massive correction we have seen in crude oil prices and also on expectations on a rate cut from the RBI on 18th June. Crude oil price correction recently is also a reason why the rate cut expectations grew so strong among investors. This is pretty much why the leadership in this market rally has come from the banking index.
How to approach this market now?
Long term investors who have still not bought into the market, I suggest you to remain on cash and wait for another correction in the markets. Don’t worry, the markets are not going to run away to new highs. Most of the problems we’re facing today in this world will remain even after this rally ends and thus I believe that markets could go and visit lower levels. You should try to look into entering on dips whenever that opportunity comes.
What’s the threat to this market rally?
Market is going to closely watch the news events that are lined up next week. We have Inflation numbers on Tuesday, IIP numbers on Thursday, Greece elections on Sunday and RBI policy on Monday. If Greece election results are not favourable, markets globally could see further slide. Markets are also largely expecting a rate cut and if that does not happen, our markets will surely drop back to where we were before the rally started. Market wants to see RBI shifting it’s focus on growth than being adamant on inflation and thus if the RBI does not deliver, markets will take it on the chin.
Where to buy if market comes down?
Stick to good quality stocks only when entering the market. If you’re a medium term investor, you want to make sure that you enter those stocks that are likely to go up in medium term along with the market. Don’t buy stocks that have no chance of participating in the medium term rallies. For me, my best bets remain in the private banking names like Yes Bank, Axis Bank, ICICI Bank etc. These stocks are of utmost quality and they participate very well in market rallies, in fact they heavily outperform nifty on upsides. For example, in the recent January rally, Yes Bank went up 60% from it’s lows and from the most recent May correction, it is already up 15-16%. So yeah, private banks remain my top picks even today. You can also look into purchasing some of the auto stocks like Tata Motors that have corrected a lot recently.
Stay away from stocks that are quoting on high valuations because they are going to give you limited returns. For example, while Yes Bank rallied 60%, HDFC Bank rallied only 30% from it’s lows in January. Both are great stocks but Yes Bank’s valuations were way cheap than HDFC Bank and so it gave more returns. So whichever sector you enter, look for the quality factor first and then compare the valuations and enter the high quality cheap valuation stock for maximising your gains. Make sure you stay away from Infrastructure, Power and Real Estate kind of stocks unless you like risking your money in uncertainties.