Buy at every dip now

The stock markets are crashing all over the world from the beginning of 2008. All major market indices in the world have corrected significantly from their peak levels.

The current market crash started with negative sentiments and news flows related to the US sub-prime crisis. The situation got worse by the weak US economic data (job market data, property prices, and consumer purchase data) and the views and predictions of a slowdown in the US economy.

Analysts say this was bound to happen as the trading deficit of the US was on the rise from the past many years and it has reached USD 760 billion in 2006.This means a deficit of two billion dollars every day. This huge trade deficit triggered depreciation of the US dollar against all major world currencies (euro, Japanese yen, Canadian dollar, British pound etc).

The most significant local factors that aggravated the cut in the domestic markets was negative investor sentiments regarding the slowdown in the industrial growth rate here due to higher interest rates, rising subsidy bill of the government (specially the fuel subsidy and agricultural loan waivers), cautious outlook projected by some large corporates, especially export-oriented businesses, and elections due at the end of 2008.

This correction again proved the point that it is very important for investors to book profits at regular intervals in the market. A correction is a healthy sign for the stock markets and it was quite long due this time, given that we have seen strong run-ups in the last couple of years.

Analysts believe that market downside risk from the current levels should not be very significant. If we look at the current situation, the market sentiments remain quite bearish (weak). Rallies in our markets are quite short-lasting and most of them end in the intraday or at the most in a couple of days. We are seeing selling pressures at every level in the market.

The chances of a relief rally are not ruled out (given that the markets are in an oversold mode) but the chances of reaching December 2007 levels look quite remote in the near future. The market could remain range-bound in the short to medium term (few weeks to a couple of months).

Here are some strategies investors can follow in the current market condition:

For those already invested in market

If you are invested in blue-chip or fundamentally-good large and mid-cap stocks, and their values have crashed, it is advisable to remain invested and invest more to average out the buying price. Valuations of many blue-chip stocks look quite attractive at this point in time and the chances of a significant decline from the current levels are quite remote.

Usually, these stocks out-perform the index and recover their losses when the market direction reverses. Investors stuck with unknown stocks should look at exiting cautiously and cutting down their losses.

For those planning to invest now

Investments in market instruments are risky investments. There is a chance of losing your principal as well. It is always advisable to invest risk capital in the markets with a medium to long-term horizon. Investors should never borrow and invest in market instruments. It is very difficult for anybody (even market experts) to time the market (sell at peak and buy at a low), so the best strategy will be to invest slowly in smaller quantities at every dip (regular intervals). Based on your investment profile, identify a portfolio of stocks, usually 5-8 stocks, and start investing in small percentages every time the market goes down.