Hitesh's Blog : How do we position ourselves in the current market?

The small and midcaps index has been under pressure since the past few days especially after the nifty crossed the strong resistance of 16000 mark.  There is a clear paradox at play here. Nifty made multiple attempts to clear the 16k mark and failed multiple times. 

Every time it went down and came up, there were different sectors which attained market fancy and rallied hard. Sectors like  real estate, textiles, tea/coffee,  paper, metals and mining  etc, just to name a few kept popping up off and on. All this while, some sectors which seemed to be in a sectoral longer term uptrend  like chemicals and speciality chemicals,  API/bulk drugs,  etc  continued to remain in a steady uptrend.  

Ever since nifty crossed the much coveted 16k mark, it seems broader markets were jinxed. To begin with there was a loss of momentum in most of the fast running stocks and sectors and after a few trading sessions, there have been sharp cuts in the small and midcaps space in the past couple of days. This has been masked by a healthy looking index chart. But that takes nothing away from the fact that a lot of portfolios skewed towards momentum and small and midcaps have suffered damages. 

Today seemed to be a day of panic selling where there were widespread cuts of 5 to 10% or more across many stocks in broader markets. This may be partially over or might extend a little more but usually after such a drubbing there is a bottom in place to be followed by a strong rally. We need to observe the next few days to see how things play out.

 

Personally I think even if  there were to be a rally the strong frothy trend seems to have been  broken and we might have a more sedate looking uptrend if and when it materialises. 

So how do we position ourselves in such a market?   

The idea should be to get out of stocks and sectors which have broken their trends and follow strict stop losses.  And get out of stocks with questionable quality if one is holding them. The good thing about most corrections is that post they are over there are always winners to be picked up. These may be stocks which already were in an uptrend but just took a pause or some stocks which enter into fresh uptrends. We will continue to search for stocks with such characteristics. 

We have received some queries about how to go about following stop losses. We usually follow end-of-day stop loss wherein if our given stop loss is violated on a closing basis , we send a mail in the evening or night to exit the stock on the following day. However if someone wants to be aggressive they can exit on the same day when the stop loss is violated in the last hour of trading. Since we have a system we follow,  we tend to follow it  as in the past.  If and when we feel there is a need to change it, we will revert back to you.

The other query is on the allocation part. We do take care to pick companies with good fundamentals ready for a technical breakout or which have already broken out so that even if someone misses out on executing stop loss for whatever reason, the return of capital is not jeopardized to a large extent. Within Hitpicks, we would advise to allocate around 5% of the portfolio to an individual stock at the time of recommendation and watch things for a few days. If the trade begins to play out, one can increase allocation slightly to take it up to 7 to 10% of the total capital allocated to Hitpicks in your portfolio. 

Wishing you all the best of health and wealth, 

Regards, 

Hitesh.