Another global sell-off greets us this Monday morning. Just when it looked like things were stabilising in the US comes another savage 300 point crash on the Dow Jones index. Much that we would like to believe, the situation hasn’t resolved itself. As the US economic data weakens and more and more of the big banks get sucked into the vortex of the mortgage crisis, global sentiment is turning very skittish. This wave of risk aversion seems to be bigger than the one we saw in March this year. The dark clouds look quite threatening.
Investor sentiment is bound to get dented as every attempt at a recovery meets with a fresh setback. Today could be the third big sell-off in seven sessions, interspersed with only modest pullbacks. So far, we have seen some pressure from the leveraged futures market but not downright panic. With every fresh sell-off though, we are getting nearer to that point where traders throw in the towel and some serious bloodletting ensues.
This hasn’t looked like May 2006 yet but if this global weakness continues for a week or two, a certain level of capitulation should not be ruled out. Investors sitting on substantial mid-cap profits may consider it prudent to take some cash home.
Every crisis finally resolves itself. The question is simply of how much time it will take and how much pain it will inflict on markets in this period of adjustment. That is difficult to predict. This too shall pass though; make no mistake about it. In fact, the next few weeks may present great opportunities. On hindsight, May 2006 was a fabulous buying opportunity. We are sitting on very strong fundamentals; the shocks are external.
Therefore, this is not the time to panic but to approach this volatility with a calm sense of opportunism. Sure, it is always tough, psychologically, to go out and buy when there is blood on the street. Doubly so, when you hear doomsayers predict demise of this bull market on TV.
As will inevitably be the case if this carnage continues. Don’t be swayed. Just spend a day making your shopping list. The top five bluechips you always wanted to own and the top five mid-cap businesses, which you think are worth betting on. Work out graded price points at which you will make staggered purchases, to get a great average entry price. Execute. Remember: No night lasts forever. It may be a rough night but day will follow.
(The writer is Executive Editor, CNBC-TV 18)