Market at its peak: Is risk-reward favourable at these levels for investing?

The Indian markets exhibited an impressive performance throughout 2023 despite encountering numerous challenges. The year witnessed a robust bullish momentum, particularly in the final two months, namely November and December 2023. Despite major global events and ongoing conflicts involving Russia and Ukraine, as well as tensions between Israel and Hamas, the overall sentiment remained bullish at the end too.

However, dwelling on the past leaves us with the pressing question of future market performance, a concern many investors grapple with when the market is riding high. It’s a common dilemma whether it’s the right time to invest when the market appears to be at its peak. Some investors are driven by FOMO (Fear of Missing Out), often leading them to buy in at elevated levels and subsequently become trapped in positions.

Is it prudent to wait for a substantial correction before making fresh investments?

Before purchasing any security, investors should evaluate whether the risk-reward ratio is favourable. Several stocks trading below their all-time high prices, many still possess untapped growth potential. Identifying sectors where potential funds might flow becomes crucial. When significant capital inflows into specific sectors, it often triggers an upward market movement. Subsequently, investors must scrutinize financially sound companies available at reasonable prices, offering a promising risk-reward ratio. These sectors to keep a close watch on are the IT, chemical, and agricultural sectors, potentially becoming the leading sectors in the upcoming days.

Retracement is an opportunity 

Technically speaking, when stocks or indices experience upward momentum, corrections are inevitable. It’s a fundamental principle that no stock or index can soar from Rs 20 to Rs 100 without retracements. Understanding this rule is crucial, prompting investors to patiently wait for retracements, often observed at significant support levels, swing highs, Fibonacci levels, or demand zones.

Invest in parts

Another strategic move is to divide the overall capital into 2 or 3 parts. While the market exhibits bullish tendencies, anticipating corrections becomes an opportunity to invest in these capital segments. Simultaneously, investors should focus on ideation, searching for companies with strong management, sound financials, robust business models, and substantial market shares compared to their competitors, and start investing when it comes to either significant support levels, swing highs, Fibonacci levels, or demand zones.

India VIX 

Historical data indicates that January tends to become volatile, and in February, the government announces the budget. Due to this event, volatility typically increases. Presently, the India VIX, the volatility index of India, is trading around 15 levels, indicating a surge from around 10, which historically has been a proven area for reversal.

Dollar Index 

The Dollar Index also needs to be considered while forming any viewpoint for the Indian market, as there is an almost inverse relation between the Indian market and the Dollar Index. Currently, the Dollar Index is trading near the 100 level, which serves as both its support and a psychological level. A review from this point could potentially create pressure on the Indian market. In May 2023, the Dollar Index found support and reversed from these same levels where it is currently trading. Therefore, before investing, one should also consider this aspect.

Nifty50 

Nifty50 is currently trading at around 21,600, displaying a notable correction of 240 points from its all-time high levels. However, the question remains whether it is opportune to buy at these levels. To find a suitable buying point, we will utilise a Fibonacci retracement tool, drawing from the bottom of the current trend, aiming to identify potential retracement levels.

As per the tool, the significant support areas could be 21,100, 20,700, 20,300, and 20,200. Yet, this doesn’t necessarily imply a drastic decline from its current levels. Additionally, it is worth noting that the index is trading approximately 1,400 points above the previous major swing, which could serve as a substantial support level if the market experiences a significant downturn.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.