Stock market today: Sensex, Nifty 50 fall about 1% each; what should be the investment strategy in a volatile market?

Nifty Bank, PSU Bank, Private Bank and Pharma indices fell over a per cent each while the IT index cracked over 2 per cent.

The domestic market has witnessed considerable volatility in recent times. The Nifty 50 is currently down by approximately one per cent for February. Should it conclude in negative territory, it would mark the second consecutive month of losses for this key benchmark index.

What should be the investment strategy in a volatile market?

Experts remain positive about the long-term prospects of the Indian market and advise adding quality stocks on the decline for the long term. However, for the short term, they recommend booking partial profit in the market.

Also Read: World markets today: US stocks sink after inflation data dampens rate cut hopes; Dow, S&P 500, Nasdaq dip over 1%

“Investors can look to exit the stocks (fully or partly) from their portfolio: (i) where they did not have conviction, but bought based on external recommendation, (ii) where they have made good profits on stocks which were bought based on their study and conviction, (iii) where the weight of the stock in their portfolio has risen too much and by rebalancing they can bring their weight to appropriate levels,” said Deepak Jasani, Head of Retail Research, HDFC Securities.

Shrey Jain, Founder and CEO of SAS Online suggests traders worried about their portfolios need to dump high beta stocks.

Jain said utilizing technical analysis indicators such as moving averages, relative strength index (RSI), and trendline analysis can help identify stocks showing signs of weakness and inform decisions to exit positions to protect capital. Traders must respect stop loss and avoid aggressive long positions for the time being.

“A correction in the stock markets highlights stocks with weak fundamentals or stocks that have run up beyond their fundamentals. Penny stocks with no fundamentals need to be dumped first. Shares of new-age companies which are not making profits can be got rid of,” said Jain.

Also Read: Jefferies initiates ‘buy’ call on Adani Enterprises with ₹3,800 target price

What to avoid during a market downturn

Nikunj Saraf, Vice President at Choice Wealth underscored that companies saddled with excessive debt often suffer the most in market downturns.

“Research shows that firms with debt-to-equity ratios above two are at higher risk of significant underperformance during economic contractions,” said Saraf.

Saraf added that historical data reveals that cyclical stocks, such as those in the automotive or luxury goods sectors, tend to amplify losses during market downturns. Statistical analysis indicates a correlation coefficient of 0.7 between GDP growth and the performance of these sectors during recessions.

Also Read: Buoyant on industrials, financial, real estate, infra, says Jiten Doshi of Enam AMC

Moreover, stocks with deteriorating fundamentals, including declining revenues and weakening profit margins, are statistically more likely to underperform during market downturns. Historical regression analysis shows a strong negative correlation between key fundamental metrics and stock performance during recessions, said Saraf.

Additionally, stocks trading at elevated price-to-earnings ratios are more susceptible to correction during market downturns. Historical price-to-earnings dispersion analysis reveals that stocks in the top quartile of valuation ratios experience sharper declines during market contractions, Saraf underscored.

Saraf further pointed out that investments in speculative or risky assets, such as penny stocks or companies with unproven business models, incur disproportionately large losses during market downturns. Stocks with limited liquidity face increased selling pressure during market downturns, leading to exacerbated price declines. Studies on bid-ask spreads and trading volume data underscore the challenges of exiting positions in illiquid stocks during turbulent market conditions.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

Here’s your comprehensive 3-minute summary of all the things Finance Minister Nirmala Sitharaman said in her Budget speech: Click to download!

Published: 14 Feb 2024, 10:00 AM IST