In my previous piece, I argued that the Indian market was trading at premium valuations in a global equity environment that is increasingly not looking comfortable with high valuations.
Since then, the warning signs have become more ominous. Bond yields have risen to decadal highs, inflation remains sticky, and the US dollar continues to strengthen.
But as the saying goes, "at a certain price, the market becomes immune to bad news".
Speaking of prices, the market closed last week with red weekly candles for the seventh time — a record since 2002 — with a fresh, sharp fall today.
All this means the market could be due for a short-term bounce.
Hazarding a guess on short-term movements is fraught with danger but the reason is straight forward: markets look oversold on technical parameters, and as Jim Rogers would say, "When everybody is on one side of the boat, you should go to the other side."
But the question isn't whether you should buy the dip. It's what to buy and for how long.
The answer is not as straight forward.
Traders can wait for signs of the market bottoming out and then wait for a technical bounce.
For investors, it's early to say if any such bounce will last.
After all, at a fundamental level, markets have still only gone from expensive to less expensive, and are only now sitting at just above the historical mean.
For the Indian market to turn around and launch itself into a bull run, many factors will need to align, not least of which is liquidity.
But that liquidity has been in short supply since the global AI trade has crowded out investment into non-AI countries.
That does not mean that selective buying opportunity won't emerge or hasn't emerged in select stocks.
But if there's one thing that history has shown us: stocks that led a bull market stop leading once that bull market breaks.
This means that irrespective of whether a near term bounce is in order, or the market continues to consolidate, or gets into a bull run, a fresh set of stocks will come to the fore.
Investors who are fully invested should review their holdings and go back to the basics: strong franchises with durable cash flows and preferably trading at a discount to their intrinsic value. The above line may sound a mouthful but put simply, investors should look for companies whose long-term prospects are intact and where a fall is nothing but a discount.
What about investors who already have a portfolio chockful of stocks that have taken it on the chin?
The simplest rule on whether to hold on to a falling stock or switch is this: "if you did not hold this stock, would you buy it at current levels?". If the answer comes back yes, you hold. If not, you switch.
Finally, are markets at levels where you would back the truck up? (Read sell other assets in favour of fresh stock purchases.)
The answer is a clear no, as the market, despite the fall, has not yet offered a firesale. That would be another 10-20 percent lower from current levels.
Will we reach there? Only time will tell.
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