Monday’s fall means that the Indian stock market is once again in the grip of bears and, because this downward breakout comes after a long consolidation, it
clearly indicates that the markets are poised for a further fall. Technically, too, key indices are all set to test their recent lows touched on 16 July, and chances are quite high that the market may fall another 10-15%, before hitting its bottom in the short term.
Though it is difficult to predict the exact level where the market could actually bottom out, one thing looks almost certain: There is more pain to come.
In terms of levels, the support level of 13,149 points of the Sensex is very important; if it falls below this level, then it will most likely touch 12,514 points, which is the next important support level. However, a close below this level would mean a sharp fall, with the next meaningful support expected at around 11,872 points.
So, what should investors do? For starters, they should tread, and trade, very cautiously. Day traders may find significant opportunities to make money in coming days but medium- to long-term investors will find the going tough. In the week ahead, I expect a further fall on the bourses on Tuesday, which will spill over to Wednesday and Thursday. However, on Friday some bargain buying may be seen.
This analysis is based on a classical technical study, which has proved itself in such tough times. I think long- and medium-term investors need not panic and should hold on to the major part of their portfolio, converting only some of it into cash so that they can buy stocks at lower levels and average their cost of acquisition. There is no general rule that can be applied to all stocks, as buying or selling stocks is based on fundamentals and timed by technical studies.
Setback: News of Lehman Brothers’ bankruptcy dampened sentiments at BSE. The Sensex dropped 469.54 points to close at 13,531.27. Ashesh Shah / Mint
However, going by one rule of thumb, investors should pare part of their holdings of expensive stocks (stocks which are overvalued) and cover them later, possibly around 1,800 points below current levels. In such a market, overvalued stocks tend to correct more than correctly valued ones. And since opportunities arise out of chaos, investors should keep themselves ready for bargain hunting after the markets stabilize following the current turmoil.
A final note of caution. Although Indian markets plunged following news of Lehman Brothers’ bankruptcy filing, Merrill Lynch’s acquisition by Bank of America and insurer AIG’s fund crunch, they recovered by close of trading Monday.
However, a scare gripped global markets once again after pre-market trade showed the stocks of Lehman Brothers trading at 63 cents, down $3.02, AIG at $7.50, down $4.64. Fortunately, Indian markets were closed by then. With the resurfacing of financial crisis in the US and chances of more setbacks for the US financial system, the undertone on global bourses including India remain extremely bearish.
On Monday, the Dow Jones Industrial Average plunged 288.55 points, or 2.53%, to 11,133.44 in the first 10 minutes of trading.
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Vipul Verma is a New Delhi-based independent investment adviser. Your comments and questions to this column are welcome at firstname.lastname@example.org