Sunday, January 10, 2010

Tips for range-bound markets

Strategies for investors in range-bound markets :

After a sharp rally in September and October (both Sensex and Nifty gained almost 20 per cent during this rally), the markets are in a correction mode from the last couple of weeks.

The recent correction offers entry points to investors who missed out during the last bull run and are waiting to enter the markets. Analysts expect the markets to trade in a range before the next big move.

Here are some factors that indicate a range-bound market in the near future:

Results and uncertainty on recovery:

The second quarter results season has come to an end, and the markets are now expected to consolidate through the next few weeks as there are no major triggers /events expected in the domestic markets.
There is uncertainty and nervousness on the global economic recovery front. The huge stimulus packages announced by central banks across the world have pushed the inflation rates significantly in many countries .
The central banks of many countries are planning to tighten monetary policies. In fact, some countries have already hiked interest rates. Many global investors doubt the ability to sustain the economic recovery in the absence of stimulus packages.

US interest rates:

In the US, the inflation rate is still quite low and the Federal Reserve has recently reiterated that the soft interest rate regime will continue for an extended period of time.
As long as the soft interest rate environment continues in the US, sentiments of global investors will remain positive. These positive sentiments of large institutional investors will result in more fund flows to emerging Asian markets like India.


With the rally in September and October, the valuations in the domestic markets are over-stretched . A correction was over-due and analysts believe the markets will consolidate before moving to higher levels.

Opportunities for investors:

The second quarter results season is over and the markets have been through a sharp correction. There are opportunities for all categories of investors.

Here are some strategies you can adopt in the current market conditions:

For investors with low risk appetite:

Those with a low risk appetite should look at investing in blue-chip stocks - preferably index stocks. Historically, index stocks give good returns over a long term and come with relatively lower risk. Usually, during a market correction some stocks slide more than others . You need to analyse the cause of such sharp declines and avoid such stocks.

For investors with high risk appetite:

Those with a high risk appetite can look at investing in a mix of mid-cap and large-cap stocks. Mid-cap stocks with a high beta can give better returns during a bull market. On the other hand, large-cap stocks would provide more stability to the portfolio during a side-way market movement and correction phase.

The percentage of allocation to mid-cap and largecap stocks should be based on your capacity to take risk and time available to actively manage the portfolio .

For medium-term investors:

Short and medium-term investors should normally target stocks in sectors that are out-performing the markets. Booking profits at regular intervals is very important for such investors. Hence, only those who have sufficient time and knowledge of the markets should invest with a short or medium-term perspective .
As the markets have been through a correction, these investors can look at picking fundamentally - good stocks in sectors that are in the limelight presently.

For long-term investors:

Long-term investors should target sectors and stocks that have the potential to give returns in multiples. Long-term investors should pick stocks that have the potential to grow in the next few years or sectors that are expected to out-perform in the next couple of years. Periodic review and shuffle of portfolio based on sector /stock performance is highly recommended for these investors.

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