InvestorQ : I have spotted some signals of warning in the market. Should I short or exit longs?
Sadaf Khan made post

I have spotted some signals of warning in the market. Should I short or exit longs?

Answer
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Ria Jain answered.
2 years ago


It is one thing to spot a signal and another thing to act upon it. In fact, acting is a lot harder. The question is whether to act immediately or whether you should wait for further ratifications. The question is whether you should act absolutely or whether you should act relatively. Clearly, there is a 3-pronged approach to take this decision based on the signals. Firstly, apply the test of consistent signalling by markets. If you get an odd signal that could be noise but if you get signals from multiple indicators like price, volumes, futures, options and institutional selling then you must take these signals seriously. Secondly, you need to apply the relativity test. Are the signals restricted to that stock only or are they spread across the sector or theme? For example, in 2011 the negative signals were visible across the capital goods sector. Lastly, apply the test of corporate governance. This is a very important test and as Mr. Narayana Murthy says, this normally seals the deal. If you put awkward questions to the management and don’t get satisfactory answers then you must believe the signal. In the long run, markets are a weighing machine. In the short run, the markets are a slotting machine, but the signals given are priceless.