Panic selling is a phenomenon where investors, gripped by fear, rush to sell their holdings when the market falls. Fear of further losses and erosion of gains in profitable stocks can overwhelm even long-term investors, leading to hasty decisions that may not be in line with their financial goals.
To understand the impact of panic selling, it is important to examine specific data on major market corrections. Large one-day declines often indicate widespread panic and fear among investors.
The table above lists 13 cases where the Nifty 50 index experienced a one-day decline of more than 4% between 2011 and 2024. The recovery period varied, ranging from just 1 day to 133 days, with an average recovery period of 38 days. Notably, the market recovered within 30 days in 9 out of 13 cases. This rapid recovery highlights the market’s ability to bounce back from sharp declines quickly. The decline with the longest recovery period is mainly due to external factors or the severity of the global crisis. for investors who stay invested versus those who exit when they decline. A good index of 50 shows a positive return in the month after the date of recovery in 10 out of 12 cases recorded, indicating that the market often continues to recover after the initial recovery. The average return 1 month forward is about 4%.
People tend to feel the pain of a loss more acutely than the pleasure of a gain, leading to a disproportionate reaction to market downturns. This psychological bias often causes investors to sell assets at the worst possible time. Investors who follow herd behavior by selling their holdings often miss out on subsequent recoveries and rallies.
The prevalence of positive returns after recovery underlines the importance of maintaining a long-term perspective and resisting the urge to exit the market during periods of volatility.
During a down market, investors often think that it is wise to average stocks. However, going against the trend may be ignoring the risks that cause others to sell. These declines can often cover the bottom line of individual companies. Therefore, as the saying goes, ‘Sometimes, doing nothing is the best thing’, being patient when the market is down can be the wisest choice.
History teaches us that markets are volatile but resilient. By avoiding the trap of panic selling and staying invested through market downturns, investors can position themselves to benefit from long-term rallies and growth. It’s not about timing the market, but timing the market that ultimately leads to investment success.
Technical Overview:
ETMarkets.comThe Nifty hit a new high of 24,174 but settled at 24,011, up 6.57% in June, capping off one of the Nifty’s best rallies. In the last week alone the Nifty rallied 2.17%, rising from a low of 23,350 to a high of 24,174.
Sectoral performance showed mixed to positive trends. Nifty Energy and IT sectors led the gains with 3.29% and 2.72% respectively while Nifty Realty declined 2.40%. The Mid and Small-cap segments maintained a positive outlook, indicating an overall bullish market breadth.
India’s VIX is currently at 13.80, oscillating between the 13-15 range, suggesting a neutral outlook. However, a surge above the 15 level could cause panic among the bulls.
Technically, the Nifty is trading above its short-term moving average, with strong support at the 23.6% Fibonacci retracement level at 23,500. Nifty looks overextended, showing some room for a short-term correction if it falls below 23,850.
