Don't Chase The Momentum, But Buy The Dips

Indian stock markets have been on a tear. The BSE Sensex has clocked one of its strongest one-day gains since January 2015 marking a sharp reversal in fortunes of investors. In a day that saw global cues dictating direction, the prospects of Greek debt relief and rising oil prices came as a welcome relief to the markets.

The BSE Sensex surged 577 points, i.e. 2.2 per cent. Nearly all stocks in the BSE Sensex gained, barring one, as the recovery was led by IT and financial services companies.

Bulls dominated the proceedings throughout. Initially, the Sensex started proceedings with about 200 points, but as the day progressed the slowly as investors began to step on the pedal eventually taking the market to 575 point gains.

Bears and short-sellers were badly mauled as nobody expected such a sharp rebound towards end of settlement.

Oil price has been rising and is close to the psychological levels of $50, which is helping shore up global confidence levels. Rising oil price is expected to help oil producing countries to bridge their deficits, and simultaneously ensures that sovereign wealth funds run are not pressing huge sales in global markets.

As opposed to foreign investors, domestic institutions have been buyers in recent times, and their confidence in the domestic markets is beginning to pay off. Foreign investors were seen lightening up some of their holdings last few weeks. But domestic investors have been lending tremendous support to the markets buying in large volumes.

Global markets also saw a cheer coming from eurozone as the finance ministers and the International Monetary Funding reached an agreement that paves the way for making fresh loans to Greece as a part of the bailout package.

There was another surprise in store for investors. Global investors did not react to the news that China weakened its dollar fixing price which did send stock prices into a tizzy the last time such a move happened.

But the biggest confidence booster for the market is perhaps coming from the US markets. Global markets are slowly coming around to the fact the US Fed will raise rates in June. But at the same time, a rate hike is signaling a stronger US economy, which will be better for US companies, markets and ultimately will result in higher stock prices.

Now What?
The global markets are flush with funds and rising oil signals that sovereign wealth funds are going to ease their selling. With heavy supply being ruled out, chances are that Indian stocks may not do badly in the coming weeks and months.

Further, domestic demand is higher as investors are on the ground and buying stocks. Early domestic investors, who entered the field the last few weeks, bagged a good chance to accumulate at lower prices. Domestic institutions purchased stocks worth Rs 2,600 crore last week, and all signs are pointing that this ball will continue to roll.

The smart couple of hundred point gains will clearly send positive cues to domestic investors. In the course of the next few weeks, some of the momentum is likely to run off on private sector financials, autos, and select metal companies. And clearly, the momentum is beginning to sway towards Indian stocks.

However, domestic investors should not throw caution to the wind, but instead wait for an opportunity to buy. The markets are not out of their volatile moods just yet, and so an occasional draw down cannot be ruled out. It's these moments that investors should watch. Hence, go for the buy trigger only when stocks correct.

In the long run, a 'buy on dips' is more superior to a 'chase the momentum' strategy.