The world markets have corrected for the last few days , especially the Indian stock market indexes nifty and Sensex , such corrections always tempts the investors and traders alike to buy stocks available at cheaper valuations , but should you or should you not buy stocks in such sudden market corrections ? The answer to this question is complicated , below we will discuss what should be the correct strategy that should be employed by the retail investors and traders.
Significant correction in Nifty , Important levels broken –
Nifty 50 ( Indian Stock market Index) has corrected significantly over the week with the largest fall coming on 26 Feb 2021 which was the largest single day fall in months , but this presents us an opportunity or should investors / swing traders wait more ? Since the Nifty 50 has broken important support levels no one can say with certainty that the correction has completed and bullish trend will resume , rising bond yields combined with bearish global markets have exacerbated the fall in Nifty 50 on 26 Feb 2021.
what are the reasons for market correction ?
One major reason for the falls like that on 26 Feb is the profit booking by the FII’s ( Foreign Institutional Investors ) in India stock market , FII’s have been pumping millions in the Indian stock market since November 2020 , profit booking or them pulling back their money has caused unrest in the market , combined with the rising bond yields and negative global sentiment of world markets the condition has catapulted into a full blown pullback or correction.
Should you buy stocks at cheap valuations in market correction ?
Whenever the stock market plummets the retail investors are tempted to buy stocks that are available at cheaper valuations , but no one knows when the correction might end and when will the market bottom out so the best strategy should be to watch for important levels on the index as well as track the stocks for technical support levels , if the stocks that you are interested in are holding their support levels then that might be an indication of a buying opportunity in those stocks , buying blindly just because the market has fallen or because your favorite stocks is available at cheaper price is a wrong strategy , if a stock breaks a major support level then the trader or investor must wait because more bearish move will certainly manifest in that particular stock , in case of break of important support levels traders must look for shorting opportunity.
What should investors do during market correction ? –
One strategy every investor can apply during market corrections is to buy or hold only low Beta stocks , if an investor is holding high beta stocks during such huge corrections then it will damage the portfolio significantly , the best strategy should be to move from high beta to low beta stocks , investors must look to book profits wherever possible in high beta stocks. Those low beta stocks that are holding their major support levels should be the number 1 buying candidates for every investor and swing trader.
Don’t now what is Beta ? Confused ? Learn what is Beta here in our older article.
Investors must avoid averaging down their holdings in order to cut losses , averaging down is a classical mistake that new retail investors make , great examples are of Reliance communications and Yes Bank where investors kept on averaging down in hope of bullish reversal but that move just never came , want to know how to correctly average stocks ? Read This
What should traders do in market corrections ?
Traders main focus in any market correction should be to go with the trend and find high beta stocks that have given significantly bullish moves in the bull run , such high beta stocks fall like pack of cards whenever the index tanks thus giving great profit making opportunities to day traders , traders can use strategies like ABCD patterns , opening range breakdowns , VWAP strategies or moving average strategies to short such high beta stocks during market corrections .
Just remember one thing a bullish market moves slowly and steadily like someone climbing stairs and bearish market just jumps out of the window from the 3rd floor of the building , it happens quick and traders and investors must be ready for such corrections / pullbacks .
Final thoughts –
Stock market corrections are just the normal part of the process , no trader or investor should be intimidated by the corrections or pullbacks in the market , a correction in fact gives retail investors opportunities to buy stocks at low P/E , but buying just because the stock is available at “attractive” price isn’t a strategy that anyone should employ , rather one must look carefully for the best opportunities as discussed above.