Even though there are still few hours remaining for coronation of Narendra Modi as India’s next prime minister, the stocks markets have behaved as if India is already transformed. This is the idiosyncrasy of markets they run so high on sentiments. The ground realities haven’t changed much since Manmohan Singh left office, so the exuberance on stock markets for an outsider is very tempting.
Am I the one who has missed the boat ?
Can I still enter markets at this level ?
Where should I put my money – on the stock that has risen 50% in last one month or Something which is still to be played out ?
If these are the questions haunting you – Read on
First getting the facts right – Stock market is on song and every Suresh, Naresh and Pranesh is making money in stocks in 2014. The benchmark indices have risen almost 8% in last one month with some stocks like BHEL up astonishingly 45% in this period . These are maniac times and it is very exciting to be a stock trader these days. But what about an outsider has he really missed boat ?
My answer is NO, there is still some steam left in this current rally and if we hear some exciting announcements ( Read on ground situation still remains same) from the new government the bull run is going to continue for some time. So one can enter stocks even at these levels.
Now the most important question – Where should this outsider make entry ? A very difficult question however I have a theory which has worked for me in past it is called the Management and Momentum box theory
Y axis measures management of companies and X axis shows last one month momentum vis a vis broader market
The dark green box are the companies which have had good momentum in current market and have competent management running them. These become my first choice to trade long.
The light green box has companies which have competent management however the current rally has not inspired them, hence I would avoid them as I don’t want to play hope strategy.
The Light red box has companies which have had the biggest run in market, however based on prior experience their management have not been perfect allocator of capital and have brought investors a lot of pain. I will be long on them however I watching their movements like hawk.
The dark red companies are a total avoid cases, until and unless you are contrarian and I am definitely not.
The underlying theory behind M&M box is simple – good companies with capable management will be able to leverage the modified environment to their advantage much faster than good companies with shallow management.
NB – This post is for educational purpose it would be foolish to act purely based on this post. The author is not liable for any profits or losses for any such action.