Panic selling or doing nothing: The wisest choice for investors

Indian markets have been riding a wave of unprecedented highs, setting new records week after week. However, this bull run hit a roadblock on June 4, 2024, when the market experienced a sharp decline of 5.93%. However, the market recovered from this sharp fall within three trading days. This underscores the fascinating dynamics of investor psychology and panic selling, where emotions often drive decisions more than rational analysis.

Panic selling is a phenomenon where investors, gripped by fear, rush to sell their holdings during a market decline. The fear of further losses and erosion of gains in profitable stocks can overwhelm even long-term investors, leading to hasty decisions that may not align with their financial goals.

To understand the impact of panic selling, it is essential to examine specific data on major market corrections. Large single-day declines often indicate widespread panic and fear among investors.

The table above lists 13 instances where the Nifty 50 index experienced a single-day decline of over 4% between 2011 and 2024.The recovery periods varied significantly, ranging from just 1 day to 133 days, with an average recovery time of 38 days. Notably, the markets recovered within 30 days in 9 out of 13 instances. These swift recoveries highlight the market’s ability to rebound from sharp declines relatively quickly.The declines with the most prolonged recovery periods are primarily due to external factors or the severity of the global crisis.One of the most compelling arguments against panic selling is the comparative returns for investors who stay invested versus those who exit during declines. The Nifty 50 index showed positive returns in the month following the recovery date in 10 out of 12 recorded instances, indicating that markets often continue to rebound after an initial recovery. The average 1-month forward return is approximately 4%.

People tend to feel the pain of losses more acutely than the pleasure of gains, leading to a disproportionate reaction to market downturns. This psychological bias often results in investors selling off assets at the worst possible times. Investors who follow herd behavior by selling their holdings often miss out on the subsequent recovery and rallies.

The prevalence of positive returns post-recovery underscores the importance of maintaining a long-term perspective and resisting the urge to exit the market during periods of volatility.

During market declines, investors often wonder if it’s wise to average their stocks. However, going against the trend can mean ignoring the risks that lead others to sell. Such downturns can often mask the weak fundamentals of individual companies. Therefore, as the saying goes, ‘Sometimes, doing nothing is the best thing to do’, staying patient during market downturns can prove to be the wisest choice.

History teaches us that markets are inherently volatile yet resilient. By avoiding the trap of panic selling and staying invested through market downturns, investors can position themselves to benefit from subsequent rallies and long-term growth. It is not about timing the market, but time in the market that ultimately leads to investment success.

Technical Outlook:

Nifty marked a new high of 24,174 but settled at 24,011, up 6.57% in June, capping off one of the best rallies in the Nifty. In the past week alone the Nifty rallied 2.17%, rising from a low of 23,350 to a high of 24,174.

The sectoral performance showed a mixed to positive trend. Nifty Energy and IT sectors led the gains with 3.29% and 2.72% respectively while Nifty Realty declined by 2.40%. The Mid and Small-cap segments maintained a positive outlook, indicating an overall bullish market breadth.

The India VIX currently stands at 13.80, oscillating between the 13-15 range, suggesting a neutral outlook. However, a surge above the 15 level could induce panic among the bulls.

Technically, Nifty is trading above its short-term moving average, with strong support at the Fibonacci retracement level of 23.6% at 23,500. The Nifty appears overextended, indicating some room for a short-term correction if it falls below 23,850.