Market Moves: It's time to exercise caution

It was around this time 2 years ago that our markets embarked upon the frenzied climb to Mount 21000 on the Sensex. And the end result was a steep fall to sub 8000 levels within 11 months from the highs created in January 2008. A majority of the analysts were talking of levels above 25000 at that time. Eversince the market touched 17000 on the Sensex (5000 on the Nifty) recently, these analysts are back to their old games. Investors are being advised to buy stocks at high prices, as if there is no tomorrow. Generally, the feeling of being 'Left out' lures retail investors to make the same mistakes repeatedly. Even Mutual Funds which were sitting on huge piles of cash when the markets were down in dumps, have invested heavily in the markets and their cash levels are down to between 5-10%. Agreed, that the economy is on a recovery path, but the process will be very slow and steady, and one should not expect the profits of the companies to rebound so soon to command such rich valuations. Foreign Institutional Investors have turned cautious at higher levels, and we may witness rounds of FII selling in the days to come. For retail investors, it is time to be patient. Generally, small investors who are worried about the safety of their principal investment should keep away from the markets at this juncture. Investment through SIP/STP may be continued, but do not get disturbed if the NAV of your fund temporarily dips below your average purchase price.

But this does not mean that there are no good opportunities to buy at this juncture. History tells us that every new bull run is made up of new market leaders, whereas the old winners fall by the wayside. At the current valuations most of the leaders of the last bull run like Reliance, L&T, BHEL, etc. look either fully priced or overpriced. On the other hand Auto and Realty sectors have had a fairly good run in the recent past, so they are also richly priced at current levels. If selective buying has to be considered, sectors like Retail (Pantaloon, Videocon, Geetanjali), Pharma & Healthcare (Ranbaxy, Fortis) etc. can be considered on dips.

But to reap  good returns from this market one must  have a minimum  investment horizon of 1-2 years, because that would be the time when corporate earnings catch up with the valuations. Yet, the market may surprise us on the upside because of the excess liquidity available in the system.