investment strategy: ETMarkets Smart Talk: Avoid Bottom Fishing Because A Falling Knife Is Always Dangerous – Mayuresh Joshi

“When the market is in a correction phase or trying to find a potential bottom before the rally starts, investors should not bottom fish because a falling knife is always dangerous,” he says. mayuresh joshiHead of Research – Equity, William O’Neil India.

In an interview with ETMarkets, Joshi said: “Let the markets reach a clear uptrend direction identified from a Follow-up Day. Until then, it is better to stay on the sidelines and preserve capital.” Edited excerpts:

Both Sensex and Nifty50 are down double digits from their highs. How should investors navigate the current market volatility?
For decades, the emotions that guide investors have not changed. Fear, hope, pride and greed may rule the market more than investors would admit.

Significantly, the sharp drop in the stock market can be unnerving for investors, often triggering emotions. The best way to navigate today’s market is to control your emotions and let a rules-based approach show you the way.

When indices drop by double digits from their highs, the technical damage is severe. Therefore, do not try to catch the falling knife. Wait for the market to form a bottom.

Let stocks that are making good gains show technical strength. There are many uncertainties globally, and forecasting is never a wise thing to do for such events.

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US markets are about to enter a bear market. What kind of impact do you see in stock markets around the world? Do you see more exits from India, as well as a pick-up in risk-off sentiment?
Since 1971, there have been 33 S&P 500 corrections (9% below highs and below 200-DMA), of which seven became bear markets. Six sectors, including Technology, Consumer Cyclicals and Retail, are trading 10% or more below the two major moving averages in the US. Technology is trading ~30% off highs. The breadth is decidedly negative, with few stocks trading above the 50-day DMA. There are problems in the global supply chain and inflation remains high. It is squeezing consumers and businesses.

This is pushing the US Fed to raise rates rapidly. The cycle of higher inflation and higher rates is a new reality, and right now, the stock market is still adjusting to that new reality. And yes, no one knows if it will be a “soft or hard landing”.

These problems are not limited to the US, but to all major developed and developing economies. Therefore, the volatility will remain, and the bottoming process could take a bit until the new realities adjust. India has outperformed, and the investment made in 2020 is still generating good returns.

Therefore, there are many outflows and they can remain for some time.

The Modi government will complete 8 years in office on May 26. Many stocks became multibaggers in the same period and benchmark indices doubled in the same period. What are his views, do you think the government laid the foundation for strong market conditions?
The government has been very proactive and bold in taking the necessary measures for the economy. The forceful mandate in 2014 was after decades in India.

This raised hopes of broad reforms, and the government delivered well. The implementation of GST, corporate tax cuts, privatisations, Make in India, economic packages during difficult covid times, increased spending through infrastructure projects, export promotion, new technologies and many others have laid a solid foundation for economic growth.

All this will have a very positive impact on the development of the coming years. GDP will expand, and so will corporate profits. New opportunities in the economy will create new growth stories and some growth names will become multi-packers.

In addition, the improvement in profits will help to increase the valuation of companies. The positive growth of the economy will also attract foreign investment. A combination of all these can drive the market higher.

After the recent drop, do you think the Indian market has entered the buying zone?
According to William O’Neil’s methodology, the market is in a rally attempt, which means the market (NIFTY) has created a potential bottom of 15,735. We need a follow-up day, i.e. a 1.5% or higher move up on volumes higher than the previous day to bring the markets into a confirmed uptrend.

Until the market enters an uptrend phase, we avoid bottom fishing and remain defensive in the market, not looking to add risk. This also means selling or shortening positions and preserving capital.

Recent bounces on Nifty have been on low volumes, which can be very misleading when markets are trading 5%-7% below their 50- and 200-DMA.

Which sectors look attractive after the recent drop?
According to our Panaray product, consumer staples, basic materials, utilities and energy are outperforming and improving.

A global investment bank was recently underweight IT. In which sectors are you underweight amid an uncertain global environment?
The recent drop was broad-based. Almost all sector indices came under pressure. With the exception of Nifty FMCG and Auto, all sector indices are trading below their 50-DMA. Metals, autos and pharmaceuticals indices are on a rally. Other than these indices, all other indices look weak.

What is your opinion on the coin? How is it affecting FII flows?
The rupee weakened to a record low against the dollar due to

Outflows of foreign funds and increase in world oil prices. The US dollar and yen are trading stronger as investors move into safe haven assets.

According to RBI calculations, almost every 5% depreciation in the rupee adds around 10-15 basis points to inflation. So given that inflation is already very high and the RBI has been relatively slow to catch up when it comes to raising interest rates to tackle inflation, as of now the outlook is not too good for the Indian rupee.

Higher crude oil prices and a depreciating rupee are putting pressure on the current account deficit.

India can defend the depreciation of the rupee by using its foreign exchange reserves of almost $600 billion. Now there is no need to press the panic button.

FIIs have been on a sell-off in Indian equities, and were net sellers of Indian equities for eight consecutive months. If the rupee depreciates further, there may be more FII sales.

The monthly SIP (Systematic Investment Scheme) contribution also saw a decrease in April of Rs 11,863.09 crore from Rs 12,327.9 crore in the previous month. Do you think retail investors are wary of the markets at current levels?
SIP monthly contributions decreased in April to Rs. 11,863.09 crore vs. Rs. 12,327.9 crore in March, but SIP accounts reached an all-time high in April of 53.9 crore against the previous high of 52.7 crore in March.

The decrease in SIP contributions would have occurred due to the volatility in the markets and the fear around macros at the global and national levels. Recent NFO allocations may also have diverted old SIP contributions.

What would be your advice to retail investors after a double-digit decline from highs? Things investors should avoid doing?
Even after the recent pullback, Nifty is trading 5%-7% below its 50-200 DMA, which is not a good sign for the index.

When the market is in a correction phase or trying to find a potential bottom before the rally starts, investors should not bottom fish because a falling knife is always dangerous.

Let the markets reach a clear uptrend direction identified from a tracking day. Until then, it is better to stay on the sidelines and preserve capital.

(Disclaimer: The recommendations, suggestions, points of view and opinions given by the experts are their own. These do not represent the views of the Economic Times)

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