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Sensex tanks 6,600 points in 36 sessions; How to come out winners from this market


The panic over the economic fallout of the coronavirus outbreak caused a deep crack in financial markets globally, and Dalal Street too has suffered major damage.

BSE benchmark Sensex tanked 6,639 points in 36 sessions to close at 35,634 on Monday, coming down from its all-time high of 42,273 hit on January 20.

This has in a way sent the investment theses haywire for most investors. Analysts say panicking in such situation can lead to more wealth erosion. Instead, investors should focus on protecting capital by avoiding some common mistakes that they usually make in a downtrend market.

Buying low P/E stocks

Price-to-earnings ratio is a common valuation tool. But a buying or selling decision made on the basis of this ratio alone is not prudent. Expensive stocks can become cheap, and cheap stocks can become cheaper in a down market. Trying to catch a stock ‘on sale’ is always fraught with risk. In many cases, stocks with low P/E ratios may be suffering from weak fundamentals, where shrinking market share may have resulted in lower earnings growth. That’s not something you want to see in a stock. Remember, the best merchandise often sells at pricey valuation due to strong fundamentals and bullish growth prospects.

“Don’t try to catch a falling knife, wait for the market to settle before stepping in to buy value,” said Aamar Deo Singh, Head Advisory at Angel Broking.

Buying before a base is formed

During the recent market correction, many stocks fell to their respective 200-DMA levels and only some found support. For some traders, long-term support meant buying opportunities.

“The key to making money in such a market is waiting until the base formation is complete. In most cases, stocks that have come down to their 200-day lines may have done so amid signs of institutional selling. Wait for the stock to prove itself, and look for signs of institutional buying as stock builds the right side of the base. Then you have a legitimate base,” William O’Neil & Co said in its latest report.

Buying every possible breakout
William O’Neil & Co said bullish stock charts tempt investors all the time in a down market. Some growth names will hang in there with compelling charts. “A breakout may work for a while, but it will likely be shortlived. While stocks that hold up the best in a down-market can go on to be the next leaders, they still should not be bought during a downtrend,” it said.

Averaging your losses
Suppose a stock trades at Rs 100 a share. Your cost basis is Rs 100. The stock heads lower, and you buy an equal amount of shares at Rs 80, lowering your cost basis to Rs 90. Then you add further at Rs 75 after it breaches its 50-and 200-DMAs. The problem is market participants normally tend to average down their holdings, which are under tremendous institutional selling pressure. “By doing this, you will be doing some serious damage to your portfolio,” say market veterans. “It rarely makes sense to buy a stock that has the potential to spiral lower before finally hitting a bottom,” they say.

Stop paying attention
It is easy to lose interest when stocks are selling off, but market downtrends let high-quality names take a breather and eventually build new bases. “When a new uptrend is confirmed, breakouts deliver the biggest gains. One should focus on the most resilient names with the least amount of technical damage,” say analysts.

Market outlook
The light is still not visible at the end of the tunnel amid a rise in the number of coronavirus cases throughout the world. China has again reported an uptick in new confirmed cases of infections, reversing four straight days of slowdown, driven by infected individuals arriving from abroad.

Some market experts are advising investors to keep power dry. “Right now, nothing seems like a safer bet amid the ongoing selling due to coronavirus fear and involvement of human capital, which is presented in all sectors,” said Narendra Solanki, Head of Fundamental Research (Investment Services) and AVP Equity Research, Anand Rathi Shares & Stock Brokers.

“It’s basically a risk-off kind of scenario rather than shifting portfolio from high risk to low risk. This volatility will run its course through the next few weeks, until we find some kind of peak in coronavirus cases globally,” he said.





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