Investors should consider booking profits in stocks that rose 20–25%; here’s why

On Tuesday, we changed market status to a Confirmed Uptrend as the Nifty50 closed above its previous rally high of 17,640.

According to our methodology, we increase exposure toward the market in a Confirmed Uptrend. Our conviction in adding stocks to our model portfolio increases, Mayuresh Joshi, Head of Research – Equity, William O’Neil India, said.

As 75% of the stocks follow the general market, the probability of successful breakouts increases when a market is in a Confirmed Uptrend.

Everyone is happy in a bull market. However, a successful investor knows when to book profits and look for other opportunities.

So, it is pertinent to determine weakness in the market. But how can one pre-empt a probable weakness in the market to lock in gains and play a defensive stance with little or no exposure?

A distribution day can provide a systematic and credible approach to do just that. Joshi explains what should investors’ do:
 
What is a Distribution Day?
 
A distribution day is when a market representative index (for example, the Nifty50) loses more than 0.2% in a trading session, with volume higher than that of the previous session.

When a distribution day occurs, it hints that the big institutional investors are exiting or reducing their positions in the market. Institutional activity moves any market, especially in India, where retail participation is small.
 
How does it Help Sense Market Weakness?
 
An investor counts all valid distribution days during a Confirmed Uptrend. Successive distribution days imply a weakening market.

But, what threshold of distribution day count would be indicative enough to say the market is under pressure?

A distribution day count of 3–4 is benign and normal in a Confirmed Uptrend. But when this count increases to 6–7, one should prepare to trim positions.
 
Distribution Day Expiry
 
Though a distribution day hints at institutions liquidating their positions, it loses its impact after 25 trading sessions. A distribution day is also removed from the count after the index rallies 5% above that day’s close.
 
Current Market Status
 
Currently, the distribution day count stands at three. We will change the status to an Uptrend Under pressure if the index adds one more distribution day or if Nifty breaches its 50-DMA and market leaders show signs of deterioration in their price actions.

Investors should consider booking profits in stocks that have performed well and have advanced 20–25% from their ideal buy points.

Even if the market undergoes a small correction, these stocks are more likely to consolidate and test their moving averages.

Furthermore, stocks slipping below their 50- and 200-DMA on above-average volume should be sold. Consider exiting stocks that have declined 8% from their buy price.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)