Ace trader and investor Sushil Kedia said on April 7 that the steep rise in the volatility indicator VIX shows that markets are behaving extremely irrationally, but that does not suggest that stocks are bottoming out.
Traders should stop obsessing over levels, as that only works in a strongly trending market, not when the 'quantitative structure of the market is broken', Kedia told Moneycontrol.
Sushil Kedia said notions that a certain set of stocks will not fall due to 'strong fundamental factors' will not hold either, as all stocks tend to decline in a broad-based meltdown like the current one. He added that stocks which have already seen steep declines may not be the right candidates for short-selling.
“This is a kind of breakdown moment—not just in terms of prices. Theoretically speaking, when the VIX or implied volatility goes above 50, that's a breakdown of quant finance models. It implies that markets are trading at a pricing that suggests the probability of stock prices going below zero is real. Now, that’s an unreal proposition,” Kedia said.
“Whenever volatility exceeds 50 or comes close to it, markets enter a zone where no logic works,” said Kedia, At 12:10 pm, India VIX was hovering around 58 level.
The Volatility Index (VIX), often called the 'fear gauge', measures market expectations of near-term volatility and tends to spike during periods of panic or uncertainty. “The irrational pessimism, the irrational fear, goes to such extremes that stock prices, based on quantitative back-calculations, appear to reflect a more-than-zero probability of going below zero. In an unreal market, it is better to avoid being too intelligent,” said Kedia.
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The amount of money people are willing to pay for portfolio insurance and put options at such elevated prices reflects flawed market mathematics, Kedia said. “Let the boiled blood, the frayed nerves, the crashing minds of market men calm down first, and let normalcy return in behaviour,” advised Sushil Kedia.
On whether the markets are closer to bottoming out, Kedia said, “The larger part of the damage is done. If we ask a commonsensical question—vis-a-vis how much we have fallen, how much more is left to fall—I would say the majority of the fall in most stocks is done.”
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“The last trading bottom for the Nifty wasn’t a very secure one, but we are again getting closer to a final bottoming-out zone. We are not calling it a bottom yet because individual stocks can still see a 10–12% carnage,” said Kedia. “If you want to go short further from here, the answer from our side is: short only those stocks that are yet to fall. Short the laggards in this fall.”
Kedia advised investors who still have cash to start nibbling. “We are advising our clients to utilise cash very slowly over the next 4–5 days and do some shopping,” he said. “This is not the time to rely heavily on descriptive wisdom or logic. That’s what the charts are saying.”
He dismissed 'theories' that suggest banks may be the last to fall, arguing they too will eventually decline. “Later, when banks collapse, the justification might be that if big companies are going to lose money due to this tariff war, it’s going to affect banking too. All I want to tell investors is: we are not here to prove how intelligent we are."
"When you’re in the markets, your only duty is to protect capital and try to make money - not to prove your intelligence."
“We are going to short-sell banks in this atmosphere, but we will avoid going short on IT stocks anymore,” Kedia said. “If it is a laggard in falling, we will sell it. Maybe if a stock that has fallen gives a stable picture over the next 2–3 days, we might start investing cash into it. But this is clearly not the time to be aggressively buying long into a leveraged position.”
On whether this is the proverbial 'time to buy when there is blood on the Street', for long-term investors, Kedia said, “With a thousand-point cut in a single day on a gap down, it could very well be that moment. Still, when someone is inflicted with a deep wound, when a sword is thrust into someone’s intestines—that’s not the time to act brave. We have to give it some time to heal. The shock needs to be absorbed first,” cautioned Kedia.
However, the veteran investor said markets may be closer to levels where one can start buying confidently towards the end of the week. “Right now, the panic and pain have just begun, so allow some time for things to settle,” he added.
Kedia dismissed the relevance of levels to track, in the current context. “Obsession with levels is very childish. Levels are things that work in normal times when markets are trending strongly. But when markets are going through this level of stupidity, trying to play them based on price levels is actually stupid,” said Kedia.
“One has to forget price levels and focus on pain tolerance—and slowly nibble into cash delivery positions to build an investment portfolio. Leveraged trading and jumping in and out will have to wait - maybe for a few weeks,” Kedia added.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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