Markets are at their strongest now with many stocks scaling new highs in sync with the benchmark indices. The Nifty has been hitting new highs consecutively. The broader markets have also gained momentum and hit new all-time highs. Remember, three out of four stocks follow the market. Many investors make the mistake of staying away when markets make such new highs, thinking they will get back in when the markets correct.
Here are some tips on buying stocks in such a scenario.
Per William O’Neil’s CANSLIM investing methodology, the ‘N’ factor stands for a ‘New Product,’ ‘New Management,’ ‘New High,’ or any other new factor, which could trigger a startling advancement in the stock. The positive change in a stock’s operating environment ultimately drives its price into newer realms. Taking positions in stocks at new highs may seem risky to the majority of investors. About 98% of individual investors would stay away from a stock making new highs.
Rationale Supporting These Buying Tips
The demand for a stock is proportional to the optimism surrounding future growth prospects of the company. Thus, the increase in demand for a stock drives up its price. In contrast, when a stock is trending downward, we see distribution a result of decreasing investor interest in the company’s future activities. Similarly, investing in a stock struggling to break above its lows implies we are diverting funds into less productive companies that may end up folding with time.
Rather than buy every stock that makes a new high, put money on one that breaks out of a sound base pattern before it sails above the pivot on volume that is at least 40% higher than the average. Investing in a stock when the price is way too extended, say 7% or higher from its pivot, is also not ideal. The market rally is a result of the overall strength of stocks. Picking stocks at new highs and breaking out of strong base patterns will enable one to participate in a market uptrend.
Tata Power: We added the stock to our model portfolio on September 15, when it broke out of its stage-2c flat base on above-average volume. At the time, the stock was trading at its decade-high of Rs 138. From a low of Rs 27 in May 2020, it surged to Rs 140 in 16 months. Many investors would stay away from such stocks, believing the rally to have ended or about to. However, we have initiated a new position. The stock has given more than 60% return in less than a month. We do not expect such returns in every addition. We let the winners run and cut losses quickly in laggards.