We have been writing for the last few weeks now, that it is time to take profits off the table in stocks. Last week, we mentioned a few reasons for the need to sell out, if you have made the money. Since then the indices have plunged another 5 to 6 per cent and a daily fall of 2 per cent is now becoming increasingly common. Let us see a few reasons why we believe that the markets are due for more and at what levels you should be buying.
Bond yields are surging
Rising bond yields in the US pose the biggest worry for the stock markets. We have not seen Foreign Portfolio Investors net sell in the cash market relentlessly, like they have done this week.
In fact, the net sell figure for FPIs in the cash market on Friday was a staggering Rs 3,300 crores, due to rising bond yields. We rarely see these kind of numbers.
The yield on the benchmark 10-year US Treasury note was higher at 3.23 percent, just off it's highest level since May 2011.
This is not good news for stock market investors, as rising yields mean FPIs will dump stocks in favour of safe and secure bonds.
Iran sanctions to kick-in
The crude rally may continue as Iran sanctions kick-in next month. Most analysts feel that the stock markets are not estimating correctly, the risks that could emerge from sanctions. Crude could hit the dollar 100 mark, which could be a big risk for the Indian economy and for the stock markets as well.
As long as crude keeps trending higher, the rupee will fall, further aggravating selling pressure. Where crude prices would settle is difficult to say. At the moment, it does not seem to be settling. A hike to $100 levels cannot be completely ruled out.
Elections round the corner
State elections are barely a couple of months away. Once these are complete, we will see the next round of elections to the central government.
Election outcomes are very hard to predict. It would be hard to predict the outcome, though one thing is certain that the markets would be increasingly volatile in the next few months, as the various surveys emerge.
If you want to buy the dips, you may gladly do so, but sell on rallies is the key.
What would be a reasonable level to buy?
If the indices drop another 10 per cent from the current levels and the Sensex trades at around the 31,000 levels, it would be ideal to buy into good quality names.
This means the trailing p/e would be around the 20 levels and the one year forward p/e around 17 times, assuming a 15 times growth. At around these levels one can enter good quality names.
In the last few years, we have seen valuations clearly stretched with a buying frenzy in small and midcap stocks, which have now corrected sharply. Wait for the 30,000 to 31,000 levels on the index before buying.