Book Partial Profit Now !
Book Partial Profit Now ! Indian equity markets, even though looking steady for the longer horizon, look quite stretched for the near term. Shohini Nath and Yogesh Supekar examine if it is the right time to book partial profits, while the DSIJ research team comes out with a list of stocks where at least partial profits can be booked.
Arun Bhojwani is a veteran in the stock market. He has invested in the markets for more than 20 years now. He has had very few multi-baggers in his portfolio as he has very rarely held any stock in the portfolio for more than one or two years. However, he has managed to beat Sensex year-on-year over these years. "Timely profit-booking is the secret of my portfolio success", say Bhojwani.
Indeed, profit-booking is the key to market success and is as crucial as identifying investing opportunities. Majority of the investors invest their time in analysing stocks and identifying the best stock ideas, but very few give enough importance to "booking profit optimally". Most investors do not have any profit-booking strategy. Profitbooking decision, be it full or partial booking, should also be taken after looking at the market condition. Is it the right time to book profits in the markets or should one sit tight and wait for stock prices to inch up further? That is the key question to be dealt with for success in stock market investing.
Why book profits?
Equity markets never move in a linear fashion. There are rallies and there are interim corrections. Investment advisors usually advise investors to invest for the long term. The dilemma for the investors is that there is no clear definition of what is long term. Is it 1 year, 2 years, 3 years or 5 years? How does one decide how long to hold on to any stock?
One needs to keep booking profits regularly as the markets are dynamic and the business cycles may take a U-turn, thus impacting the stock prices negatively. Also, investors have financial goals and hence it is important that an investment horizon is predefined and profits are booked accordingly to meet the goals.
One can look at valuations and decide whether to book profits and how much of the profits to book. Ratios such as P/E and PEG can be used deftly in order to understand whether the markets are expensive or reasonably valued.
"By booking profits regularly, an investor is reducing his risk in this volatile and uncertain market by taking the opportunity to book profits and solidify his gains, even if the investor has a long term holding strategy."
How to book profits using technical analysis?
Selecting the stock might be easier, but booking profits at the right price and the right time can overcome the greed and fear within you and help you play successfully in any given market condition.
We all are well-versed with the term "Trend is a Friend" and the share price charts help us to identify when the trend is about to change. Likewise, in an uptrend, the charts in combination with the volumes, indicators and oscillators, signal the change in trend. However, booking profits at higher levels well before the trend changes to bearish is what a successful trader does. Methodically, the stocks tend to work in a cycle, starting with:
"Book profits between distribution phase and panic selling"
1.Accumulation, where the smart money enters the stock to bring some bounce in the prices, which are down or consolidating.
2. Public participation comes in when the price gives a breakout with rising volumes. Indicators give a support to the price and oscillators bounce back from the oversold zone or positive crossovers from wherever they are lying earlier. The stock prices too start forming the candlestick patterns.
3.Distribution is when the smart money exits from the stock as it reaches the anticipated price level.
4.Panic selling, where the other participants too exit after the stock indicates reversal.
Generally, to catch the perfect bearish reversal, we need to understand the gimmicks which the charts depict in-between the distribution and the panic selling phases. There is a huge optimism about the stock and it is anticipated that the prices may continue to move northwards. During this euphoria phase, the ‘smart money' starts distributing and here starts the battle between the buyers and sellers, which result in the stock prices closing right at the middle or lower end of the day's range. As a result, there is formation of Doji or a bearish reversal pattern. It is better to square off your position when you are following a certain bullish pattern and your target is achieved, by not being too greedy.
Indicators and oscillators cannot work in isolation, but candlestick reversal patterns, along with higher volumes, ought to be supported by them. The oscillators reversing from the overbought zone or a negative crossover from anywhere above the 55-60 levels can be a 'book profit' signal. Further, the prices either resisting at the indicators like moving averages or breaching those lines from above too give a book profit signal.
"Sometimes one is unable to exit right at the top, and by the time investor reacts, the stock corrects sharply giving more 'down' days than the 'up' days. In that case, one need not fear and just wait for a short covering (a bounce back) using the retracements and exit at a bounce".
Identifying market tops for booking profits
Identifying market tops and profit
booking can be two separate goals; however, every investor would ideally like to book profits at the market tops. William J. O'Neil, who is a prolific author on the subject, has explained various rules under which the market tops can be identified. One of the ways to identify a market top is to observe the climax top activity. Trader can sell a stock that gets active and has run up for two or three weeks on a weekly chart or for seven of eight days in a row or eight of ten days on the daily chart. Such top can used for profit-booking.
Partial profits can also be booked when your stock goes through its upper channel line after a huge run up. Profits can also be booked in those counters where the stocks have already made an extended advance and suddenly makes its greatest one-day drop since the beginning of the uptrend.
Market tops can also be identified by studying the growth trajectory of the company. If you study the Q0Q data and YoY data on earnings growth and net sales growth and are able to ascertain that the growth is unsustainable at higher levels, one can book profits in the counter.
Indian Markets and Other Emerging Markets
While it is true that earnings matter for stock prices, in the current scenario, the global events and the developments in the emerging markets and currencies seem to be the most dominating factors for stock prices. There is a global equity sell-off in emerging markets owing to the current crisis in currencies.
If the year 2017 was the year of global co-ordinated growth, the year 2018 seems to be the year of simmering crisis for emerging markets. Russia, Brazil, China, Turkey, Indonesia, South Africa, Argentina and India all have witnessed severe drop in the currency rates vis-à-vis the US dollar. As long as trade war is expected to continue and the US Fed continues to hike interest rates, the strength in USD will persist. There is no doubt that the damage is expected for the emerging markets in the coming months. The only question when it comes to falling currency rates is: how much and when will the trend reversal happen?
"The USD may remain on the front foot against emerging markets' currencies as long as interest rates rise in the US".
Having said that, Indian equity markets have been the 'odd man out' in the emerging market space so far, with the key benchmark indices outperforming the MSCI Emerging Market index by a good margin. 
Even as there are manifold aspects of weaker economy affecting Argentina and Brazil performance, it is the unorthodox monetary policy and hostile government policies by the Erdogan government that is impacting Turkey negatively. Russia remains a commodity exporter and Chinese economy was already showing signs of slowdown when the trade war fear emerged. Trade war is expected to impact China the most as it remains the target country in the trade war. South Africa has already entered the recessionary zone, thus increasing fears of a contagion in the emerging market space.
India, on the other hand, has been recording world-beating growth and expanding by more than 7 per cent annually. India remains isolated from global economic and trade headwinds, thus making it an attractive investment destination in the current scenario. The rising oil prices remain a key concern for India as it imports 70 per cent of its energy requirement. Rising USD and crude oil prices is a double whammy for the Indian economy as it threatens to widen India's fiscal deficit.
In spite of all the above issues facing the emerging markets, it still remains the best asset class for the long-term investors who are hungry for higher yields. Emerging markets promise higher growth and, therefore, remain attractive for global investors.
However, looking at the current market situation and the valuations we are trading in, investors can expect some kind of selling pressure in the markets in the near term. In the long term, higher growth can come from emerging market space, but in the near term, the headwinds indicate a profit-booking opportunity in them.
Mustafa Nadeem
CEO, Epic Research
"Any gain on the table should be taken without any remorse"
Is it right time to book profits for those who are sitting on them?
Investors should strongly consider booking profits right now. We believe the valuations are stretched and one should be cautious when considering fresh investments. Nifty had traded at PE of 28.22 for the month of August, which is the highest in the last almost 20 years. If we look at it from the macro view, then the headwinds from the US and the higher crude prices are a double whammy for the Indian markets. Any gain on the table should be taken without any remorse. One advice we strongly give to our clients is always book profits after a long bull run, which is the one we are recently witnessing. There is always the dilemma of losing out 100% gain, but then that's part and parcel of investing. You have to have some discipline and keep the greed aside.
How best to know when to book profits? Any specific indicators one should look at while booking profits?
This has been a pertinent question, especially when we talk about retail investors. One cannot stay put with any hope and look at the investments magically grow after 10 years.
The Relative Strength Index (RSI) is one indicator which can signal an early sign of booking partial profits or even liquidating investments. RSI is a leading indicator, so it can help investors make early decisions about future price movements. The RSI oscillates between the value of 1 to 100, indicating overbought and oversold conditions. Though, in a strong bull run, the RSI would keep on making lower lows and markets may still be moving upwards. The same goes for downside, where the RSI may start moving upwards before the market makes a bottom. This is something which should signal an investor to make better decisions.
Historically, a RSI (14) reading above 80 on the weekly charts on the Nifty signals a potential top to be formed in the near term. So the investors can book some profits there and liquidate the portfolio when the RSI (14) on the weekly charts goes below 50-45 range. If you are looking for a potential bottom, wait for RSI (14) on the weekly charts to go below 35-30 levels. You can consider making fresh investments once you get that reading. |
What is your outlook on the markets at this juncture? Will the small-caps and mid-caps outperform large-caps in the coming quarters?
We are still bullish on the markets at this point, but we understand that there has been some sector rotation and momentum has shifted to sectors which did not participate in the bull run. We are looking at companies who would earn better from high crude prices and would benefit from the recent fall in Indian currency. When we look at historical performance, Nifty made a bottom at 7900 level in Dec. 2016 and then went to the 11,100 level in Jan 2018, which is a 40% return in around two years.
We saw a correction of 10% thereafter. Nifty Mid-cap 100 during the same time gave 58% return and Nifty Small-cap 100 gave 72%. So the data suggest that small-caps and mid-caps will outperform the large-caps in the coming quarters. One has to be very meticulous in approach because not every company is a gem in these spaces. One needs to be methodical while picking small-caps and mid-caps for investing. We too have some model portfolios in these spaces, but we keep reviewing them quarterly and keep a tab on them for out performance.
Conclusion:-
One of the basic tenets of portfolio management is restructuring the portfolio on a continuous basis. Restructuring would require churning of portfolio on a regular basis, be it quarterly, semi-annually or annually. In order to beat the markets, a long-term portfolio managed passively may not be a solution. Active management of portfolio is required to generate alpha or, in other words, beat the markets. Thus, profit booking on regular basis becomes an essential element of equity portfolio management.
Depending on their own skill sets, investors may apply fundamental analysis or technical analysis to ascertain when to book profits. A simple strategy of booking profit whenever a stock jumps by more than 25 per cent in less than one year of holding period can also work in favour of investors wherever an investor lacks clarity on booking profits. The valuations and portfolio rebalancing should dominate the profit-booking decisions for long term investors.
After doing a fusion analysis (Technical and Fundamental) we have arrived at a list of stocks in which it is advised to book partial profits at least. Investors can use the below list and take appropriate decision. 