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What to do when market trade at mad valuations?
This is a difficult market for both investors and traders. One cannot boldly go long because the valuations are stretched and one cannot boldly go short because there is free flow of money buying every dip.
So the question is what should one do?
Let's consider the options and advantages and disadvantages of all options:
* Book partial profits, stay in cash and wait for a correction
* Go long and buy
* Go short and sell
Book partial profits, stay in cash and wait for a correction
Adv: Can buy at lower levels if/when the market correct to 8000/8200 odd levels. Now those levels are just 5-7% away and a 5% correction is not unheard of during a bull run.
Dis-Adv: Market stays where it is and waits for Q2/Q3 results that will be loaded with the benefits of a good monsoon. Or it could even rally during Nov-Dec time frame anticipating good results. In case, there is an earnings improvement in Q2/Q3 it is not going to be a 1 or 2 qtr improvement. There will be enough momentum in the earnings and as a result there will be quick moves in the stock prices. Once there is clarity of earnings recovery, market is not going to offer stocks at cheaper price to people who wanted to make a "safe bet".
Go long and buy
Adv: While value is hard to find in these times, it is has not disappeared totally. Yes, the indices are overpriced and over valued but there are stocks available for decent valuations even in these times. Buying now, will give you a feeling of not missing out on the bull run that might come after Q2/Q3 results.
Dis-Adv: In the speculative period between Q1 and Q2 earning there is chances the markets might correct by 5-7% because of the lack of any positive triggers. Buying now, means one needs the courage to seem temporary red in the portfolio for the next 3 months.
Go short and sell
Adv: Gain of 5-7%
Dis-Adv: Markets might stay flat or might not correct all the way till 8000. Might just dip another 200 points. Once needs to be very alert in this case and be prepared to act quickly. Holding shorts will spoil the good night sleep.
So option 3 of going shot definitely does not look attractive as the risks and restlessness is very high for a gain of 5-7%.
So between option 1 and 2 which one is better?
According to me, if you are a individual stock picker with an investment horizon of at least 9 months to an year and can see some red in the portfolio temporarily without getting bothered then the way to go would be a combination of option 1 and 2. i.e. book profits in the stuff that seems overvalued but at the same time keep and eye out for value. Yes, value is hard to come by but is still available.
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