Rising Volatility Calls For Accumulating Cash For The Next Leg

Stock market volatility is rising across the globe and the Indian markets are expected to face the music. The stock markets valuations levels are also not providing room for comfort at 24.3 times earnings. At these levels, the markets are bordering in the over-valued zone. And this does not rule out the possibility that investors will be taking out some profits from the table.

And that may be a right strategy. The spectacular ride in the stock markets ever since Budget 2016 was announced has returned investors close to 25 percent in a little over six months, which is akin to annualized returns of 46.5 percent. Investors now have to keep an eye out on the volatility and go slow on their investments in the coming weeks.

The 9,000 barrier is proving a stiff resistance because signs of an all-round earnings recovery has been elusive. Hence, stock markets will need to consolidate at current levels and unwind some of the excessive speculation and froth in the markets.

Luckily, stock markets are not at bubble zones, which can often lead to a long dry spell in the market. Hence, in a few weeks investors could look for re-entry levels once the current bouts of volatility out of the way.

Foreign inflows into the markets have been strong and robust, and hence there is no need for investors to throw in the towel. At the same time, there is a need to invest in a staggered way because the volatility will not go away in a hurry. At higher levels, markets become heavier and even small events can cause high amounts of disturbances in the global, and Indian markets.

One of the major drivers of this market has been the banking sector, which is likely to see some big movements in the coming weeks. Private sector stocks like Axis which has run up significantly is going through some volatility. Ditto for public sector banks like SBI and Bank of Baroda.

But needless to say, the current volatility in the market will prove to be a buying opportunity in the banking sector over the long run. Make no mistake, the Indian market is strong fundamentally. But a correction perhaps is overdue because of the long and fast race up to the near 9,000 levels.

The markets will get another shot in the arm after the US elections are over, and a clearer picture emerges on the US economic and interest rate front.

Speaking of economic activity, at the domestic level, the Nikkei Indian Services Business Activity index has increased at a faster pace to 54.7 in August posting its highest ever levels in three-and-a-half years. This shows that economic activity is gathering momentum. Hence, investors should keep the faith in stocks in the long run.

But in the short run, markets are at a stage where a small correction will only make it healthier and will clean up some speculative froth that has been building up lately. Therefore, taking out partial profits at these levels will build up cash in the hands of investors to make purchases at lower levels.

Often investors find themselves short of cash when the markets provide fantastic opportunities at lower levels. Hence, prepare now and accumulate cash for the next rally.