Dear Nifty bulls, it’s time to take chips off the table

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Taking profits off the table and reducing exposure in markets is crucial to manage risk and secure gains. Monitoring key data points reveals underlying weakness, emphasizing the importance of balancing risk and reward in current market conditions.

Investing in markets and playing poker has a lot of similarities in terms of , strategy, and uncertainty. In both, participants make decisions based on incomplete information, trying to anticipate and react to the actions of others. Both involve and adjusting tactics as the situation evolves.

In both poker and , is crucial for managing risk and . In poker, when you're ahead, it's essential to "cash in" some of your winnings by withdrawing chips from the game.

Similarly, in stock markets, taking profits off the table involves selling a portion of your holdings when prices are favorable. This action not only crystallizes gains but also reduces exposure to or unexpected events.

Ultimately, both in poker and stock markets, the importance of taking chips off the table lies in maintaining a healthy balance between risk and reward. It's about securing gains while they're available and to withstand inevitable downturns or setbacks.

I believe this is the right time to take some chips off the table. Considering the prevailing risks in the markets, I believe it would be better if investors reduce their exposure.

I wrote about a few data points , , and in June 2022 while calling an end to the . has rallied more than 40% from June’22 lows of 15,200.

Some of these same data points are now hinting that the risk on the downside is high and it would be better to reduce exposure. Let’s check out these data points one by one.

Here's a chart showing the net percentage of stocks hitting new highs versus new lows. From a peak of 27.15% on February 5, 2024, the percentage of stocks reaching new highs has dropped significantly to just 6.02% by May 6, 2024. This means that even though the index has continued to rally and hit new highs the broader market stocks are unable to clock new highs. This is a sign of weakness.

Here’s another data point. The percentage of stocks trading above their 200-day exponential moving average (EMA) has also dropped significantly, from a high of 91.42% on January 5, 2024, to currently below 69%. The 200 Day EMA is considered as a long-term indicator to gauge the trend of individual stocks.

Let’s look at one more data point. Relative Strength Index (RSI) is a popular indicator used by many to identify whether or not a stock is in momentum. A stock is considered to be in if its RSI is above 60 and bearish momentum if its RSI is below 40.

There is a notable surge in the CNX 500 stocks trading below their respective 40 RSI. As of 9 May the number of stocks trading below 40 RSI was 158 compared to 52 stocks trading above 60 RSI.

The benchmark index has only fallen 3-4% from its life time highs. However, the data points mentioned above indicates underlying weakness suggesting that risk of staying long in the market is high.

So, what to do now?

Sell everything and run?

No, not at all.

Professionals would hedge their exposure by taking a position in futures and options. If you are a retail investor who don’t prefer this then one could shift to defensive stocks like FMCG and Pharma or cash out from risky stocks and move some portion to gold and debt instruments.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the )

Source: Stocks-Markets-Economic Times