Volatility raised its ugly head for a bit in mid-day trade on Wednesday. Taking a cue from the Hang Seng, the Sensex shed 600 points in 40 minutes flat before pulling back. Even as intra-day blips go, this was a scary one. It is not unusual or unexpected to see such pullbacks for a market that has rallied 4,000 points on the trot. In fact, what has been surprising is the vertical nature of this rally. However, with so many people trying to predict the top for this move, questions will be asked.
The simplistic assumption would be that such volatility after a vertical rally of unprecedented proportions may be signalling the end of the upmove. Doubly so, since the first cracks have their origins in the strongest of markets, Hong Kong. While such an inference should not be brushed away, it is premature to draw conclusions. The weight of money is such that it can easily gobble up such blips and move further ahead. We have all seen how much momentum markets can surprise on their way up.
The most frequently asked question now is whether it is time to take profits. A trader should let the market answer that question for him. That essentially means he keeps trading the index or stocks with rising stop losses that are not too shallow and be ready to get stopped out when the market takes a sharp downswing. That way he would not sell preempting such a downmove and regret as it moves up. For investors, it is a time-horizon call. In some sectors, where the price rise has been too dramatic it is reasonable enough to raise some cash. Fresh buying commitments are probably best avoided, just for the moment, as the market seems a bit extended. However, liquidating all investments would not be wise either as the endgame for this market seems way off, even if there is to be a meaningful correction in the near term. In a bull market, buying the dips works more often than selling the rallies.
(The writer is Executive Editor, CNBC-TV 18)