Knowing how to handle a share market rally is an essential part of knowing how to invest in share market. A market rally is when a rise in the stock prices can be witnessed.
The rally can be a bull market rally or a bear market rally. The force or the driving factor behind the surge in the prices is the demand. There is a massive inflow of investment capital which keeps pushing the capital upwards.
The continuation of the phenomena would continue depending on the number of buyers and sellers. The rally would continue as long as the number of buyers is greater than the number of sellers. But the prices would be going down as soon as the numbers equal.
A long-term investor might not be affected by the minor price swings. He would be analyzing a more extended period to identify the rally. For a day trader, the surging prices in the first half of the trading session could be a rally.
What is the cause of a rally?
Several causes could be behind a rally. While some could be short-lived, the others are profound. The short-term rallies result from some events or news that distorts the demand-supply equilibrium. These could be like block deals in a sector or appointment of a new CEO by the board of directors in a company.
The long-term rallies are generally caused by some tweaks in the microeconomic factors like changes in government policy or changes in the vital rates. The decision of the government 5to relax the FDI norms would create a rally in the equity markets in the retail sector.
How can the market really be identified?
The equity analysts have a lot of tools at their disposal to identify the market rallies. One of the most critical factors that are noticed are the price movements.
The trading volume data is also used to ascertain the robustness of the rally. Charts are created from the data and interpreted, and this falls under the category of technical analysis. These technical analysis tools are the best ways to determine a rally.
Some underlying assumptions need to be followed. One of the most significant assumptions that you need to make is that the price is the best indicator of the worth of the stock. This, however, might not always be the case since it can be affected by fake news and events. The market price incorporates all different bits and pieces of information that is required to make the decisions on buying and selling.
The prices generally move in trends. A pattern is followed which could be understood. This trend might be used to forecast the price movements.
The final assumption that you would have to make is that history tends to repeat itself. This would help you to understand and predict the market psychology. The ‘rate of change’ indicator can be used to identify the stock market rally.
The closing price of a particular day would be compared to the closing price ‘X’ days ago. An average time frame of 10 days is quite acceptable.
How Can A Market Rally Be Handled?
The share market rallies keep happening now and then. You should not be turning away from the rally as it could do you good to ride the equity wave.
But a strategy is required. You might end up losing your money without a plan. The investors could be following the general rules of thumb to stay rational.
- Mode of investment – The investment must be adjusted according to the mood of the market. This is especially during the equity mutual funds which are affected by the market movements. More massive bets in the form of lump sums should not be placed. Playing safe is the best thing one could be doing during the bullish rally. A Systematic Transfer plan could be initiated to allocate the assets from the debt funds to the equity fund.
- Asset allocation strategies – You need to decide in which asset classes the money needs to be pooled. The P/E ratio of the small-cap and the midcap funds tend to surge during the market rally. However, they can be expensive and risky bets. You can never be sure if they would sustain the growth. The portfolios that are skewed towards the small-cap and the midcap funds often perish at the end of the market rally. That is why you should be quite careful. You should start tending your allocation towards the large-cap equity funds. They might not be able to beat the benchmark, but the portfolio return would be maintained within the expected levels. The penny stocks should be avoided as far as possible. You would never know if there any circular trading that is pushing the price upwards.
- Managing the portfolio risk – The investors often get polarized towards getting higher returns. The other face of investing, or risk management, is completely forgotten. If a portfolio is composed of different asset classes, the portfolio might be skewed towards equity. It might get skewed towards small-caps and midcaps in the equity-diversified portfolio. Portfolio concentration needs to be avoided as far as possible. The maximum diversification needs to be achieved. Rebalancing would keep the portfolio risk intact.
The following rebalancing strategies can be used:
- Strategic rebalancing – This involves bringing the asset allocations to the target allocations
- Dynamic rebalancing – This entails increasing the equity allocations to take advantage of the market rally
These balancing techniques should do the job most of the time. The rebalancing would conform to the risk appetite. It would also add to the investment horizon and help in getting you ahead in your investments. Strategic rebalancing should be the way to go if you have a short-term goal and do not want to get involved in unnecessary risks.
If, on the other hand, you have long-term goals and are ready to take risks, you could be experimenting with the dynamic rebalancing techniques.
It’s true that an online share market rally is an opportunity for investors, but it is not the time for rash decisions. You should be careful while making investment decisions.