Checklist for Market Risk Management

Check More Than the Stock Price

When you open the stock price page in any financial newspaper, don’t restrict yourself to just looking at the stock price. There is a lot of market wisdom in these pages if you care to spend a little more time on the page. Here are 6 things you must check on the stock price page, beyond the closing price.

1. Stock prices versus yearly highs and lows

Most stock pages cover open price, day high, day low and close price for each stock, with some also covering VWAP. This gives a good idea of the short-term bias of the stock. However, you must go a step further and also check the price with reference to the 52-week high and the 52-week low price of the stock. This gives a deeper perspective of whether the momentum is in favour of the stock or not. In a trending market, the stocks with favourable momentum trade closer to their 52-week high prices.

2. Valuation test with P/E, P/BV and Dividend Yield

These are 3 quick ratios to help assess if the stock is undervalued, overvalued or rightly valued. First look at the P/E ratio. High-growth companies with high ROE, tend to have high P/E ratios. P/E ratios must be seen with reference to growth and peer group P/E ratios. To avoid analyst bias, use a rolling 4-quarter P/E ratio. Price to book or P/BV is better suited to banks and companies with longer gestation or loss-making. Dividend yields above 4% are normally considered to be attractive and act as support for the stock price in a worst-case scenario.

3. Check for volumes and volume trends

Volumes represent the number of shares traded in a day and reinforce price movements. A sharp rise in price supported by volumes is bullish while a sharp fall in price supported by volumes is bearish. For mid-cap and small-cap shares, volumes in terms of number of shares are more relevant than value. Sudden volume spikes are normally speculative. The stock page captures sharp spikes in volumes and a sharp fall in volumes, and both give key messages. Volume trends normally serve as a good lead indicator of likely price moves in the stock.

4. New stories with new highs and new lows

We are not just referring to 52-week highs and 52-week lows, but to historic highs and lows. Normally, that does not happen, unless there is very strong momentum supported by a fundamental reason for the price spike. This can be a precursor to a larger story of re-rating happening in the stock. The reverse happens in case a stock is consistently hitting new lows.

5. Weekly and monthly gainers and losers

Newspapers, these days, provide price analytics on stocks showing gains over different time frames like 1 week, 1 month, 3 months, 6 months etc. This gives a clear idea of where the short-term momentum is concentrated. Stocks that outperform or underperform in all-time brackets clearly have short-term momentum either in their favour or against them. This is of special use to traders but is a good lead indicator tracked by long-term investors too.

6. A quick look at futures prices and OI

This is possible for the 190-200 stocks where F&O is permitted, but that is good add-on data. Futures are normally at a premium, but any divergence is an early warning signal. Accumulation is studied based on open interest or OI. Like volumes, OI underlines price trends. Rising prices with rising OI are a sign of aggressive accumulation while rising prices with falling OI are a sign of short covering. Similarly, falling futures prices with rising OI indicate short build-up while falling futures prices with falling OI indicates short covering. So, the next time you open the stock price page, look beyond just the prices.