Selective Investing in a Correcting Market: Quality & Valuation are Key
The Indian stock market has seen a significant shift from the bullish momentum of the past few years to a phase of correction. While the Nifty index has dropped nearly 10% from its peak, individual stocks have experienced much steeper corrections, with some declining 30-50% in just three months. This shift signals the need for a more cautious and selective approach, focusing on quality stocks that offer a compelling mix of growth potential and reasonable valuations.
A Change in Market Dynamics-
This is no longer the market where one can buy anything and expect consistent gains. The recent correction underscores the cyclical nature of markets and reminds investors of the importance of combining fundamental valuations with technical analysis. With rising global economic uncertainties, foreign institutional investors (FIIs) have continued to withdraw funds. But the reasons extend beyond stock valuations; the depreciating value of the Indian Rupee (INR) against the US Dollar (USD) has also influenced these outflows, reducing the purchasing power of foreign earnings and impacting FIIs’ decisions.
The Impact of INR Depreciation in Longer Run-
India’s growth story remains attractive globally, but the devaluation of the INR complicates the investment landscape. As the currency hits all-time lows against the USD, even companies with robust earnings in INR may see their purchasing power diluted internationally. This currency depreciation has forced FIIs to reassess their portfolios, prioritizing regions where currency valuations remain more stable. This highlights the nuanced nature of FII outflows, which aren’t purely based on stock valuation but are heavily influenced by currency stability and growth expectations.
Technical Analysis: Reading the Market’s Sentiment
Markets often follow patterns and cycles that technical analysis can help identify. Observing these patterns alongside fundamental valuation factors enables investors to build informed market views. Right now, multiple technical indicators suggest a continuation of bearish sentiment in the Indian market:
1. Nifty RSI: The Relative Strength Index (RSI) for Nifty on a monthly time frame has dropped from an overbought level of 82 to around 68. This suggests that, despite the recent correction, there is still room for further downside.
2. Bearish Chart Patterns: On a monthly chart, Nifty has formed an “Evening Star” pattern—a classic reversal signal. The index is also diverging significantly from its 20-month Exponential Moving Average (EMA), and historically, such divergences tend to correct over time.
3. Intraday Pattern – Shooting Star**: Recently, Nifty formed a “Shooting Star” pattern intraday, which indicates strong upper price rejection, adding weight to the bearish outlook in the shorter term.
Current Key Levels for Nifty
Navigating this market requires a clear understanding of key support and resistance levels. For Nifty, the following levels are critical:
– Support: 23,940 / 23,780 / 23,600
– Resistance: 24,130 / 24,200
These levels provide useful guidance for traders in managing entries and exits, especially for those adopting a “sell on rise” approach in line with the current market trend.
Investment Strategy: Focus on Quality and Valuation
Given the market’s current state, investors should prioritize quality stocks with strong fundamentals and attractive valuations. Here are a few key points to consider:
1. Quality over Quantity: Instead of diversifying across numerous stocks, focus on a few high-quality names with a proven track record of resilience and steady growth.
2. Valuation Matters: With the index at lower levels and individual stocks significantly corrected, valuations have become more reasonable. Look for stocks trading at attractive price-to-earnings (P/E) or price-to-book (P/B) ratios relative to their peers and historical averages.
3. Long-Term Perspective: To mitigate market volatility, set a minimum investment horizon of 4-5 years. This allows time for both the market cycle to normalize and for investments to achieve a consistent compound annual growth rate (CAGR).
Macro Factors and Wave Theory of Price–
Technical indicators alone don’t tell the full story. A thorough analysis incorporates macroeconomic trends and valuation data. Wave Theory, for example, suggests that market cycles are inevitable, with growth and corrections occurring in predictable waves. Studying price movements within these cycles helps investors anticipate potential market shifts and structure their portfolios accordingly. By reading technical charts and considering macroeconomic factors, investors can develop a balanced perspective on future price movements, enhancing their probability of success.
Conclusion – This is a time for measured decision-making, not chasing past returns. With Nifty showing signs of bearish sentiment and the INR under pressure, selective investing based on quality, valuation, and a long-term view is essential. Markets move in cycles, and in times of correction, strategic patience often pays off. For now, monitoring the key support and resistance levels and adhering to technical signals will be invaluable in navigating the market’s current phase.
Thanks, VLA Ambala – SBEI RA
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