How to conquer the next rally?
May 12, 2022
Although many investors were surprised to witness a correction so early on in the new year, a pullback was very much expected. Considering the heady gains made in the last year wherein the benchmark NSE Nifty 50 index gained 23.79%, the market was ripe and waiting.
Since then, FIIs have been sellers for almost the last 7 months. Approximately Rs 2,50,000 crore has been net outflows from equities since October 2021. Withdrawal of excess global liquidity, disruption in supply chains, rising Brent crude oil prices, weak rural demand locally and the geopolitical uncertainty created by the Ukraine-Russia face-off are some of the reasons for this wave of selling pressure. Additionally, commodity price inflation, inflationary trends in the US and central banks hiking rates aggressively has led to sharp corrections across our market.
However, we believe that now is the time to start getting ready for the next leg up. It is important to remember that pullbacks and corrections are common occurrences. What usually happens is that many investors panic & start selling their positions while others keep waiting for stability & for the environment to calm down before they can start buying stocks. But then the market snaps back real quick, making new highs before such investors can even think of entering the rally. This is a repeating phenomenon that we at StockAxis witness regularly. In the last year itself, the market had pulled back 3 times and each time it soared to new all-time highs.
If you are an investor who has missed post pullback rallies in the past due to uncertainties & confusion, then we have a piece of good news for you & that is you don't have to miss out on such rallies ever again. Looking at the correction we are in right now, it looks like there is a lot more upside to go.
#1 Don’t let fear get in your way.
There was nothing ominous in the corrections we saw last year & there is nothing ominous about the correction we are witnessing in the current year. Every bull market has them. A correction is defined as a decline between -10% and -19.99% & stocks usually correct -10% on average about once a year. There is absolutely nothing abnormal about this.
While pullbacks are never fun when they are actually happening, they are often looked back on as great buying opportunities. Remember that these are commonplace moves & learn to look at them as opportunities to buy rather than places to sell.
#2 Climb the ‘Wall of Worry’
Rising Interest rates
Historically, stocks have typically performed well in inflationary environments. However, we can all agree that the current year's high inflation rate is not really good for anyone. By raising interest rates, the central banks all over are hoping to see inflation finally coming down and for sustainable growth to continue.
That being said, the rates will still be relatively low. This is important for you to know as some people out there are worried that rising interest rates may cause a recession. But history has shown that over the last 50 years there has never been a recession (aside from 2020's pandemic-induced plunge) when the Fed’s rate was under 4%. With officials suggesting that the rates will not exceed 2.8% (by the end of 2023 and all of 2024), we can safely say that it’s a far cry from 4%.
Rising crude oil prices
As far as the rising oil prices are concerned, know that $100 per barrel of oil doesn't automatically spell doom for the economy. In fact, oil has traded above $100 in 2011, 2012, 2013 & 2014. The GDP averaged over 2.0% during that time.
During the pandemic, the demand for oil fell & the prices cratered. Hence, the production fell as well. But now, the demand for oil is strong. Especially as the world continues to reopen its economies after the pandemic. As expected, prices have followed suit but the production is still playing catch-up.
Producers virtually everywhere are racing to increase production. Especially since much of the world has either cut off or is in the process of trying to cut off its dependence on Russian oil due to their invasion of Ukraine. The shortfall will have to be made up somewhere and producers are vying to gain that new market share. While a meaningful increase in production won't happen overnight, it will surely happen and prices will eventually come down like they always do. As the saying goes ‘the cure for high prices is high prices.' The high crude oil prices are bound to bring in the much-needed increase in production that ultimately sends prices lower.
#3 Do What Actually Works
Despite everything, the economy remains resilient. In Fed's own words, the economy remains "really strong," "consumer demand is very strong," and "incomes are very strong." And the labour market is "extremely tight."
The Earnings season is upon us once again & since stocks typically go up during earnings season, now is the time to get ready for the next leg up. So how can you fully take advantage of the market right now? The next step is for you to filter out the best 10-12 stocks that you can buy.
Picking the best stocks is a lot easier when there is a proven & profitable method to do it. By focusing on what has proven to work in the past, you'll have a better idea of what your probability of success will be now and in the future. Of course, this won't preclude you from ever having another losing trade. But if your stock picking strategy picks winners more often than losers, you can feel confident that your next trade will have a high probability of success. StockAxis MILARS is one such strategy.
The ideal MILARS portfolio is formulated in accordance with the Market direction & comprises of quality stocks belonging to the leading Industries & sectors. These stocks are Market Leaders which are usually experiencing a significant Acceleration in their earnings & are stronger than their peers in terms of Relative price strength. Moreover, this strategy is designed with predefined Selling rules in order to ensure a healthy & evergreen Portfolio.
If you are looking out to curate a portfolio that is best prepared for the coming times or you want to restructure & realign your existing portfolio to suit your financial goals, then the StockAxis MILARS strategy is the right investment solution for you.