Playing volatile markets

Many people have asked me-What should I do in these volatile and turbulent times?Of course these are disturbing and stressful times and all of us need support.

Couple of things that can be done-First stop focusing too much on the news and expert analysis. Fifty different experts will be giving you “fifty” different opinions.That will “confuse” you and you might feel “lost”. Avoid that!

You might actually do well to switch off your television.Those guys are not bothered about your money. A market crash attracts more audience, so a one like today is good for them!

Now let us try to dissect the market action since last Thursday to have a better understanding of this volatility. As I have been writing in my NIFTY Analysis section, that “correction” shall come from nowhere. That correction came on Friday.

Now usually what happens on such a day is that “smart traders” get out their long positions. As these traders were early to enter around 4200, they still don’t mind giving up 100 points of profits and pocket about 350 points.Nice profit-not bad!

Another set of people are those who are feeling the “left out” pain as they couldn’t participate in the rally from 4100 to 4600.So these guys immediately step in to buy, the moment they see some correction. Thank God I am in!

Another set of people are those who couldn’t resist themselves and had gotten in around 4600+ levels. These guys are feeling nervous by Friday closing and “hoping” for a recovery.Hey God-make these markets recover!

Come Monday, the markets continue their volatile ways.The markets move in band of 100 points going nowhere. At every low level ,”left out” investors buy in and at every “higher levels” some of the “latecomers” try to get out. Smart traders position themselves to go short as high volatility indicates a near by top!

Come Tuesday, markets bounce back and are up 70 points. The “left out” investor thinks he is making some neat profits. So he buys more.Some people who bought at higher levels, average their losers thinking that market correction is “over”.The smart trader goes short with stop loss around 4550 levels .

Now comes Wednesday.The market opens with a 300 point gap.The investor who bought on Friday, Monday or Tuesday is “confused”. He doesn’t know what to do. The smart trader goes in for some shorts. The big “investors” feel jittery about global risk and start selling. Some go short in NIFTY futs to “hedge” their positions.The markets continue the slide. The “leveraged” speculator who is long starts to get margin calls. The broker sells his long positions to cover the margin. Intraday traders can’t stand the “pain” of this choppiness and they bail out. The “left out” investors don’t have the courage to step in and buy more.The smart trader again makes some money.

This is what has been happenning with the markets. In short, most of the players hate volatility especially the big players in the markets.

So during volatile times, markets fall not because of selling but more due to absence of buying. No one is ready to commit-be it an intraday trader or a long term investor. Everyone gets into a “wait and watch” situation.

Now what will happen if markets bounce back? I feel one should shift the focus on ‘volatility” rather than price action.If you want to play the “short side” you can do with wide stop losses.If markets continue to be volatile as they are , I fear a great fall might come sooner or later. Infact, I was personally able to avoid May 2006 crash by booking my profits and staying away from the markets till the volatility subsided.So you can also adopt a similar strategy.

For investors- this might be a good time to “churn” your portfolio. If long term trend in the stocks you hold is still intact, then stick with them .In case, it has ended, it might be a good time to get rid of such stocks.Living on hope can turn dangerous.

If you want to buy dips,you should be knowing if you are buying for long term investment or short term trading. If you start mixing the two, you might be in for big trouble.

Most important is to view the market movements in right perspective. Let the sanity return. Whether it happens now or later is anybody’s guess.

In case you feel confused, it might not be a bad idea to go through my previous posts on NIFTY analysis right from 4100 to 4650 and back to 4350. It might be useful in your understanding.

You might be wondering as to how 4 days back, everyone was talking about “returns’ and “targets” and today everyone is talking about “risk”! We tend to forget about risks when the going is good.

Good luck for tomorrow.Keep your mind and soul clear. And do not forget to CUT YOUR LOSSES.