NEPSE Index Playing Above All-Time High: Should I Sell? Should I Add in My Portfolio?

Disclaimer: This is NOT a prediction of NEPSE. All the possible circumstances are discussed in this piece, so do not take it as an investment recommendation. Irrespective of any expert opinion, the market just does what it does. 

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NEPSE is trading above the all-time high created in the previous bull session. As of writing, the index is at 1,925.10.

Breakaways from all-time highs are interesting and yet, scary. There's a lot of confusion among investors about the future.

Breakaways from all-time highs can be compared to a rocket launch. Scientists and engineers spend years perfecting the propulsion system, the fuel injection, and everything else. However, once the rocket lifts off from the launchpad, they just have to sit back and hope that their years of knowledge and skills will work right.

The NEPSE index is exactly at that level. Since there is no resistance level for technical analysts and chart readers, they have little idea where the index will reach. On the other hand, since fundamental analysts look at company fundamentals, profitability, and future prospect, price is irrelevant in the short term. Thus, they are even more in the dark, and maybe even ignorant about this market move.

However, we can deduce a probable conclusion from what stocks and stock indices have done in the past when they broke away from their all-time highs.

1) The breakout scares the weak hands away.

In NEPSE, we had investors who said the index won't recover from the fall at 1100 levels. If they did not get out already, this move will certainly scare them away. This is the highest the index will ever reach in the short run, they think.

According to Investopedia, many investors will sell out of a "fear of heights," especially after repeated record highs, if a stock starts edging upward into uncharted territory. Some economists say this is because record highs feel and sound unnatural to investors, even though achieving a record high can be viewed simply as an example of a market or security doing exactly what it is supposed to do, as long as the government keeps printing money and the economy keeps growing.

If this happens, the stock or index that broke out of the all-time high might consolidate for some time before it resumes its "real" trend.

2) When times are confusing, go back to your books and study notes.

Whether a price is at a record high or low, a smart investor will go back to look at the business prospects of a company. If it is well run, and business prospects for the company appear to be in line with future growth, it may make sense to ignore the distraction that a record high or low might be.

3) If you sell, you should also be smart enough to get back in.

It is understandable that resistance breakouts are always confusing. The trend can turn both ways. In this case, some investors may feel it wise to get out, empty their portfolio, and leave the guessing game altogether.

However, if the breakout is strong enough, one should also be smart enough to reenter their positions. Now, this may sometimes mean you may have to enter at a higher price than when you sold. Although this feels dumb at times, know that you got out of the guessing game when things were uncertain. Now that the uptrend is solidified, even if you enter at a higher price, the probability of the trend reversing downwards is less.

Investing is a game of probability and confirming a breakout properly keeps odds in your favor.

4) Study how the index performed before the breakout

Bullish signals are strong if a stock or an index tests the resistance multiple times before breakout. The more times the index tests a resistance or breakout, the weaker they become, and hence the index can break out of them easily. A healthy pattern like this also gives enough support for the index so that it won't break down from it when it comes back to test the support again.

However, if the breakout has happened in one single blow, it is wise to study volume and index movement after the breakout. A significant percentage of breakouts tend to be a false breakout. Thus, a breakout is not the end of a story but its beginning. Continue analyzing your portfolio carefully. 

5) One-sided markets tend to overextend everything

In a standard market, there are investors who go long and those who go short. Investors who go long bet on the company going bullish while short-sellers think the market trend will reverse and thus, they make money by betting on bearish sentiment. This balances the overall market.

However, we do not have short-sellers in NEPSE. When in a bull phase, investors with bullish sentiments are active while bears simply exit their positions and do not participate. A market consisting of bulls everywhere will hype everything.

This is also true in a bear phase. When a stock has fallen enough, there are no short-sellers who book profits and help to take the price higher or at least dampen the downwards drop. Thus, the price falls more than it otherwise would in a two-way market of bulls and bears.

Thus, this causes overextension in both the upside and the downside.