Question on buying stocks in a falling market

I am a little confused here. On the one hand you have indicated that we may be looking at a long correction phase and on the other hand you have given buy calls.

Now, from my experience when markets correct, at some point or the other, ALL stocks fall, irrespective of their strengths.  The strong ones will maybe fall less but they WILL fall.

So why the buy calls? Can you please elaborate your thought process here. It would be very helpful in taking a decision.

Thanks and Regards, 

Hiren 

Answer

The assumption that all stocks fall in a correction in incorrect.

During the bear phase which started from 2008 onwards, nifty corrected by 20-30% and stayed in a range for 4-5 years but pharma stocks gained 300-500% during that time (LUPIN,DRREDDY,SUNPHARMA, etc). Every year there will be some stocks or sectors which will outperform the market even when broader market is declining.

But why the buy calls?

I had a view that markets will correct and they have started correcting. But this has been a very slow correction and some stocks have started generating buy signals. This always happens - before the start of a big correction, some stocks will start cracking first and vice versa.

Note that I was bullish from 6000 levels while everyone was bearish... my blog posts are evidence to that. I was also probably one of the earliest to exit longs and call for a correction.

I still don't know what is going to happen - it does not matter. What I can do is minimise the risk and take a trade. It is entirely possible that (a) markets may rally for another 2-3 months and then correct or (b) correction may start next week and my buy calls will fail. In the latter, position sizing will limit the loss  to 1 % of your trading capital.

One thing which will be always clear is we will not be buying a falling stock... we will buying a stock which is strong, has given a breakout and has the buying support of the big money. So the trend will be in our favour.