What are the kinds of signals that the stock market gives?

The legendary trader, Jesse Livermore, once said “the market is a hard taskmaster. But it is also a great teacher.” Typically markets represent the worst of the herd instincts and the best of market wisdom. It has rarely happened that a market has made a big movement without giving sufficient warning and indication. This movement could be either on the upside or the downside. Even in 2008 or 2013 when the markets cracked, the markets gave us enough indications of forthcoming volatility. It is just that we missed the woods for the trees.

Ok, now let us get a get a little more specific and talk about individual stocks. Let us take the example of Educomp, a path breaking education online company in India. Once touted as the next big thing in education, it started quoting at crazy valuations in the heydays of 2007. Sadly, when the tide turned, the company saw its costs elevated, its margins dipping and its huge debt burden impossible to service. By 2013, the stock had lost over 95% of value, but then you just can’t complain. Market gave enough hints which any trader with a little bit of observation would have picked up.

Markets also throw hints on the positive side. Take the case of Bharti Airtel. The stock listed in 2002 and fell to almost 50% of its listing price. Around 2004, the numbers were picking up and Airtel was getting the free benefit of network expansion. By 2006, the stock had got close to the Rs.1000 mark, a phenomenal outperformance in just 3 years. But for the more discerning investors, the hints were always there. The markets were giving enough indications that something in the way the markets looked at the stock.