Monday, November 30, 2009

Strategy during Falls in the Market

One Strategy you should seriously consider adopting in falling markets is to buy into defensive stocks - FMCG (Fast Moving Consumer Goods) and Pharmaceuticals. They usually tend to move up and worst case, outperform the Index significantly.

Traditionally, FMCG and Pharma provide a buffer to the markets in falls. In any case, FMCG should form a part of your portfolio, but a bit more in falls. If you notice, even Warren Buffet has good holdings in this sector.

Thursday, November 5, 2009

Never Question why the Market Moves in a Certain Way

It is never wise to speculate too much on the market movement and why it will move in a certain direction violently or otherwise. On the contrary, listen to the market and do what it is saying. If you catch a good wave, just concentrate on riding it with risk and money management.

In the short term, markets move under the influences of demand and supply. You do not need to be an expert of Fed Rate cuts, Dollar Movement or any other external factors. I have observed that novices spend endless amounts of time trying to dissect economic, technical, and many other sources of information. What is baffling to them is that they still get in at the wrong time leading to losses.

Wednesday, November 4, 2009

Relentless Slide

Why does the market relentlessly slide sometimes? What to do if you are caught on the wrong side in one such slide?

The market moves in one direction, is hammered (in a fall) constantly, and keeps making new lows. This is typical in what is called a 3rd wave fall. In Elliot wave theory, the 3rd wave is the most persistent and longest lasting among the 5 waves in the major direction. You do not have to be an expert to escape or catch a 3rd wave, but you can definitely avoid wrong moves or make use of such opportunities.

As you probably experienced by now, averaging down (for a buy side strategy) is not such a good idea. Most buy side funds get caught in the 3rd wave down after buying into the 2nd wave thinking that a new high will be made. The simplest clue that the market gives before a 3rd wave fall is a lower top or a double top. This is usually a hint at an impending fall. Look for this. If the fall is of the a-b-c type, the lower top will never be close to the absolute recent top. This means that the "a" wave is sharply down and the "b" (upward wave) is nowhere close to the top. Look for this formation to avoid getting caught in a 3rd wave fall or to make use of a 3rd wave up to invest.