Nifty PE crosses 24|A statistically informed entry-exit model!


(Donald Francis) #1
www.nseindia.com/products/content/equities/indices/historical_pepb.htm
Historical S&P CNX NIFTY P/E, P/B & Div. Yield values
Date P/E P/B Div Yield
1-Sep-10 23.02 3.58 1.11
2-Sep-10 23.08 3.59 1.1
3-Sep-10 23.05 3.59 1.1
6-Sep-10 23.46 3.65 1.09
7-Sep-10 23.58 3.67 1.08
8-Sep-10 23.59 3.67 1.08
9-Sep-10 23.73 3.69 1.07
13-Sep-10 24.32 3.78 1.05

The observations below are based on 10 yr Nifty P/E data - which holds a normal distribution pattern (see article below).Between January 1999 and September 2009, the Nifty traded at low PEs of below 11 and high PEs of 28+. It hit those extreme valuations rarely. The average PE was 17.72 while the median was 17.58 and the modal value was 14.31. The standard deviation was 3.64.The Median indicates that exactly half the time, the Nifty traded below 17.58. And the Mode shows it most commonly traded between 14-15.

Today 13 Sep 2010, Nifty P/E crossed 24.32 decisively. It is inching closer to the Median+2Std Deviation (17+2x4) 25 levels - or, a period of extraordinary valuation!

If you look at the Nifty P/E distribution graph below, you may note that in the last 10 years, the market has survived beyond 25 P/E (for any extended period) only twice.The Nifty peaked in February 2000 at 1800 and at PEs of 27+. It peaked again in January 2008 at 6200 and at PEs of 28+. At all other times the market has corrected sharply.

It will be interesting to see how you guys react to my entry-exit model as explained below. what would be yours??

Rgds,

Donald

29 Sep 2009

Market Entry Exit Signals? The CNX Nifty is today trading at a PE of 22.55.

Many senior investors I speak to, have started getting cautious. They are cutting their exposures and not making fresh entries. While there may still be some stock-specific value left, valuations are rich in many frontliners.

With the FIIs continuing to pour in money, there is also talk of whether the market can touch new highs! With increasing inflows, the FIIs also reckon if the Indian currency were to appreciate to Rs. 40 to a dollar from current levels, even if that were to take 1-2 years, that's a straight 20% gain on the currency! As the Raring Bull is fond of saying, who's to argue with what valuation is right for the Indian market?

Having learnt my lessons in 2007 & 2008 (I remained invested throughout and did not book even partial profits), I am now in search of some kind of market entry exit decision-making models for myself. A senior prompted me to look at long-term historicalNifty Valuation data. He suggested astatistically informedlook at valuations can introduce some predictability to investment returns!

Between January 1999 and September 2009, the Nifty traded at low PEs of below 11 and high PEs of 28+. It hit those extreme valuations rarely. The average PE was 17.72 while the median was 17.58 and the modal value was 14.31. The standard deviation was 3.64

The Median indicated that exactly half the time, the Nifty traded below 17.58. And the Mode shows it most commonly traded between 14-15. Most of us are aware of this on an intuitive basis, even if we may not have it on our fingertips.

Let's first check whether the 10yr CNX Nifty data above holds a normal distribution pattern. The laws of normal distribution suggest valuations between 14-21 (within one standard deviation of the average) around 68 per cent of the time and valuations between 10-25 (within two SDs) around 95 per cent of the time. The actual stats are 67 percent and 95.6 percent respectively, so the reality is very close to what is expected of normally distributed Nifty PE data.

Now this is a good Bell Curve. If we look at the Nifty PE distribution data/graph above, we can see that the market is at an unusual valuation, when outside Mean+/- 1SD. And it is at an extraordinary valuation, when outside Mean+/- 2SDs.

We are always told by seniors to look for PEs lower than the long-term average, as a buying signal. Similarly higher than long-term average PEs, would signify a sell signal, right? My market entry exit model, is now refined by the laws of normal distribution! It looks something like the following:

a. At the higher end of the 14-21 scale, start cutting exposure; book partial profits
b. When it starts creeping up over 23, start selling
c. If I am still around & milking, and it goes beyond 25, exit most; make portfolio zero cost
d. At 13 or below, start buying & heavily

In October 1999, the Nifty was at PE 23 â a strong sell signal. In May 2004, it was at PE 14 â a good buy signal. Mar 2009, the NIfty PE went to being just over 12, but that wasn't as strong a signal as October 2008, when PE went below 11. It is currently (Sep 2009) at PE 22.55 - a time to get cautious again, signal!

I am convinced by the senior's suggestion of using the long-term historical Nifty PEs as a guide for my market entry exit strategy. Executing that is another matter though, and will take loads of discipline. Do I have it in me? I am asking myself this, daily:-). It might interest you to know that theFranklin Dynamic PE fundfollows a similar market entry exit strategy.

If I am able to shut out conflicting emotions and decide to act rigidly on the sell-heavily signals, it probably would also mean forgoing extraordinary returns at peaks. The CNX Nifty peaked in February 2000 at 1800 levels and at PEs of 27+. It peaked again in January 2008 at 6200 level, and at PEs of 28+!

However the discipline to forgo the cream, might also mean tremendous capital safety for me. I would not again be caught in a situation of hopelessly remaining fully-invested; worse still - be unable to bet decisively, & heavily on the very stong buy signals in Oct 2008 and Mar 2009, because all my funds were tied-up in buy-and-hold!

Happy Investing!


Boom before Bust - when does the bubble burst?
Nifty PE after all earnings have been declared
Chrome extension NIFTY PE
(Donald Francis) #2

Its reached close to breaching Nifty P/E 25 levels. Time to watch next week closely and take some good gains off the table?

If it breaches 26 levels, i will :)

Historical S&P CNX NIFTY P/E, P/B & Div. Yield values

For the period 01-09-2010 to 18-09-2010

Date P/E P/B Div Yield
01-Sep-2010 23.02 3.58 1.11
02-Sep-2010 23.08 3.59 1.10
03-Sep-2010 23.05 3.59 1.10
06-Sep-2010 23.46 3.65 1.09
07-Sep-2010 23.58 3.67 1.08
08-Sep-2010 23.59 3.67 1.08
09-Sep-2010 23.73 3.69 1.07
13-Sep-2010 24.32 3.78 1.05
14-Sep-2010 24.47 3.81 1.04
15-Sep-2010 24.74 3.85 1.03
16-Sep-2010 24.61 3.83 1.04
17-Sep-2010 24.84 3.87 1.03

(Donald Francis) #3

Nifty P/E level 25 breached today 20 Sep -Median+2STD breache don P/E basis. Though on a P/B and Dividend Yield level, its still far from median+-2STD!

I am taking a call on selling some of my 3+baggers tomorrow.

Historical S&P CNX NIFTY P/E, P/B & Div. Yield values

For the period 01-09-2010 to 20-09-2010

Date P/E P/B Div Yield
01-Sep-2010 23.02 3.58 1.11
02-Sep-2010 23.08 3.59 1.10
03-Sep-2010 23.05 3.59 1.10
06-Sep-2010 23.46 3.65 1.09
07-Sep-2010 23.58 3.67 1.08
08-Sep-2010 23.59 3.67 1.08
09-Sep-2010 23.73 3.69 1.07
13-Sep-2010 24.32 3.78 1.05
14-Sep-2010 24.47 3.81 1.04
15-Sep-2010 24.74 3.85 1.03
16-Sep-2010 24.61 3.83 1.04
17-Sep-2010 24.84 3.87 1.03
20-Sep-2010 25.25 3.93 1.01

(Manish Vachhani) #4

Hi,

Nifty PE ratio is definitely at the higher end of valuation but can we give it a premium of around 10% more based on the presenet higher GDP growth? Also the USD is going weaker and FIIs have no other option but to invest into BIC(Brazil, India & China) which is stretching the nifty. So I think at current levels, we can book partial profits or exit weaker stocks. On the rally beyond 6300, we may start selling seriously.

Manish Vachhani.


(Donald Francis) #5

The problem in our markets is thatmoney flows of the Foreign Institutional Investor (FII) is determining where share prices head in the near term. The Indian money is on the sidelines.

And that is the problem.
We have no idea what the foreign investor is likely to do - or when and why!

Excerpt from Honest Truth : Sep 22 2010

India's problem and linkage to the global economy is the money flows we rely on. While the underlying value of most Indian companies is not linked to the global economy, the price of these companies on the stock exchanges is set by the foreign investors. While most of the Indian mutual fund industry is still busy fighting for the rights of many distributors to earn opaque commissions - rather than focusing on winning investors - the foreign investors are busy investing in India (see Table 5) and have purchased USD 12.9 billion worth of Indian stocks since the start of the year. Many distributors - focused on earning commissions on the next ULIP product since SEBI has clamped down on their commissions from mutual funds - are busy advising their clients to sell their mutual funds. That accounts for the sale of USD 3.4 billion by mutual funds - this means that many investors have probably been wrongly advised! There will be some flow back of the money sold by mutual funds which will now come in via the ULIP route - minus the commissions that investors (unknowingly?) paid when being advised on this switch.


Table 5: Foreign "investors" play roulette from the cash being thrown by Helicopter Ben.

Period Net foreign Activity (US$ m) Net Local Fund Activity (US$ m) Total (US$ m) Change in BSE-30 TRI in that Period (% USD)
CY 2003 6,628 88 6,716 86.3%
CY 2004 8,669 -253 8,416 23.1%
CY 2005 10,707 3,049 13,756 42.2%
CY 2006 8,106 3,413 11,519 53.3%
CY 2007 17,655 3,222 20,877 68.5%
CY 2008 -11,974 2,501 -9,473 -60.7%
CY 2009 17,458 -1,132 16,326 89.7%
Cumulative 57,249 10,888 68,137 528.1%
August 2010 2,514 -682 1,832 -0.7%
YTD 2010 12,945 -3,402 9,543 3.0%
May 5, 2010 Greek Day -310 4 -306 -1.7%
Source: Sebi.gov.in
But the point is that the money flows of the Foreign Institutional Investor (FII) will determine where share prices head in the near term. The Indian money is on the sidelines.

And that is the problem.
We have no idea what the foreign investor is likely to do - or when and why!

Will the FII invest more in India because they are scared of the economic situation back home in Europe, Japan, UK, and USA? The FIIs did that in September 2007 - just after the now-failed Bear Stearns allowed one of their hedge funds to go bust. FIIs pumped in USD 6 billion in 4 weeks then, this caused the market to surge - and led to the peak of January 2008 and then the slide before the crash in October 2008 as the FIIs changed their views on India and other emerging markets.

If interest rates were to increase in the USA to 5% (not likely in the very near term, but that is a guess) will FIIs decide that they would rather keep their capital in US government bonds and earn a safe and steady rate of interest? If they wanted safety and a 5% return, they could sell out of India - and cause the market here to decline sharply.

What if the pensions and long term investors in Europe, Japan, UK, and USA are not allowed to invest outside their home countries? Far-fetched? Guess what President Obama is doing now - making "Made in America" a requirement on the label for products and for companies to get tax breaks. In 1972, the UK government imposed capital controls when the UK had an economic crisis. Government could impose a higher rate of taxation on capital gains on "foreign investment" that subtly discourages foreigners from owning stocks in India and other emerging markets.

Yes, it is far easier to predict the earnings of companies than it is to predict what the share price - or Index - will be at any given point in time.


(Manish Vachhani) #6

Thanks Donald for the detailed answer. We Indians are not investing in the stock market as much as we should have. Our faith in the market has been shaken in the past by the Harshad Mehtas, Ketan Parekhs and 2008 collapse. The people keep in mind the past and are feared of losing money. The Long Term Investors in India has a span of 1-3 years in their mind. Which actually should be 5-10years horizon. We also depend on the brokerage houses to invest and do not initiate the research on our own. The Indian economy which is booming like never before, the infra spending is at its best, the investment inflow is great but still the common people are not investing in Stocks. The higher interest rates paid in the EPF and Bank FDs are hindering the growth of investments in stocks and we are losing our stakes to the FIIs. Are you not surprised that the HDFC Bank & ICICI Banks are no longer Indian banks due to heavy investments by FIIs in them?

I appreciate your sincere approach toward the research of the stocks that helps so many novice investors. Hope we all will make a stronger Indian Investor base.

Manish Vachhani


(TCX) #7

Hi,

I was wondering isn’t this a bit early to start exiting?

We haven’t seen any frenzy by retail in the markets yet. That kind of euphoria where every idle discussion starts veering around to the stock markets, and stock markets make the headlines in daily newspapers too! and if you are a market player, everyone starts soliciting your advise!?

Question is how far are we from that kind of frenzy?


(Donald Francis) #8

We may be just a couple of months away from the frenzy, if you go by some reports circulating. I could not independently verify the source as BNP-see if you can

http://in.groups.yahoo.com/group/investwise/message/7352

BNP- BSE Sensex May Rise To 24000 By End Dec2010

How far could liquidity drive the market?

Liquidity typically drives markets and stock prices above fair valuation. During times of high liquidity (March-Maya06 and Jan-December a07 for
example), the market tends to trade at large premium compared to fair value. During May 2006 and Feb 2007 Sensex traded at 17-19% premium compared to our fair value, while at the peak liquidity of January 2008, it traded at 65% premium. We believe if the current run rate of FII flows continue (i.e. 0.4-0.5% of free float market cap), Sensex could touch 15-20% premium to our fair value estimate (19600 by December 2010).

GEM and AxJ funds getting good inflows

We estimate that currently GEM funds put together have slightly more than $200b in their funds and are getting $2b additional inflows per month into
their funds. AxJ funds have $65-70b in their funds and are getting $1b per month. If they decide to maintain their current weights on India, simply
additional inflows into their funds could lead to $280-300m monthly additional FII inflow into India from these two sources a nearly $120m from
AxJ Funds and $160m from GEM funds.

But Global funds could contribute much more

Based on EPFR data we estimate that global funds (i.e. those benchmarked to MSCI World) have $1.7trn in AUM. Currently global funds put together have 0.65% of their assets in India a an underweight of 0.38% compared to the benchmark weight of 1.03%. Even if we assume no further inflows into global funds, purely their reallocation to neutral position on India could lead to $6.8b additional flows into India equities. If such reallocation happens by the end of 2010 a that could mean nearly $1.7b additional inflows per month till end-2010.

DIIs a still considerable cash with insurance companies

We estimate that MFs and insurance companies put together are sitting on $9-10b cash right now. We believe MFs have INR120-140b ($2.5-3b) cash in their portfolios (at the end of August 2010). We estimate that insurance companies put together have $7-7.5b cash in their equity portfolios (8% of equity AUM). Reduction of cash positions to 4% of equity AUM could induce $3.5b inflow into equity from insurance companies. LIC has gone on record saying it wants to invest Rs600bn ($12-13bn) in equities in FY11.

Our proprietary top-down model also predicts strong FII inflows *

Our bottom up estimates suggest that India may continue to receive USD 2-2.5b of FII inflows per month in the near term (USD1.7bn from global
funds; USD300m from AxJ and GEM funds and USD500-700m from ETFs, India dedicated funds and others). We construct a proprietary top-down model to estimate of FII flows into India.

Our 5-factor model incorporates global (VIX, crude price, US ten year yields) and country-specific (USD-INR and Indian 10-yr bond yields) factors.
Our model predicts that the strong run-rate of FII flows could continue, albeit at a lower pace of USD1-1.5b/month.


(Arindam) #9

I have a thesis that FIIs will keep driving in Liquidity in our markets till Dec end and might pull the plug in the Christmas week to sweeten their year-end results.

This also ties in nicely with our local festive season -Dusshera-Diwali. So keep riding the momentum till Diwali for sure:-)


(Abhishek Basumallick) #10

Here is what I came yup with by crystal-ball gazing (the crystal ball is now pretty cloudy and filled with dust, but what-the-heck…it sure is some fun to look at it once in a while…

  • Sensex/Nifty will make a dash for the all-time high sometime soon (maybe as early as October end)

  • Either breach it or turn back just short of it.

  • A bout of profit booking follows. Indices go down 10%-15% (back to around 18K-18.5K)

  • Main indices remain sideways for the next couple of quarters.

  • Mid caps move up from now as the last few weeks the valuation gap has widened.

  • Sometime after 2-3 quarters, the next up move starts for the main indices. By that time, PE is down to about 22 (which is still high but certainly not hitting the roof).

One point to consider is that the 2008 debacle is still fresh in the minds of most people, and as long as it remains, the sentiment of fear will be there. That will prevent the markets from having a runaway rally or a breakneck fall. (I hope I am right!!!)


(TCX) #11

Yup…looking to take some good money off the table by Nov/Dec.

The markets may not correct

a) Till FIIs stop the inflows (barring a global misadventure) which seems set to continue atleast till December when they may sell to pocket gains for their financial year. FII money alone is enough to see us post new highs?

b) Till retail gets involved seriously…which also looks some months away


(Shivank) #12

One word of advise using backward looking data or backtesting guys. I ask a simple question?

The prior 10 years Nifty P/E was reflecting an Indian economy growth of 6 - 6.5%. Growth predictions starting this year and going upto next ten years are for 8 - 8.5% levels. Therefore, what was previously expensive may just be deemed fair value in the current scenario.

Another thing, in growth economies boom bust cycles are far more accelerated. The stories and the dynamics change within 3 - 4 years

I love technicals, sell when things are going down, buy when things are going up (after the fact of course), and I doubly love statistics, correlation is not causality people.

Now if you really want to see something, do an overlay chart of FII selling / Buying with DII buying / selling. Almost perfectly inversely correlated. Now after creating a data set like that, calculate the number of instances when continuous DII selling beyond say a period of two weeks coincided with market dips. See what you get :slight_smile:


(Shivank) #13

One more thing as an answer to the thread. Just as a background, I am 27, I run a long short fund in global asset classes based on absolute return strategies. Basically I punt where I see an assymetric trade (thats just jargon for low downside high upside) opportunity.

Entry exit strategies and timing strategies have been shown to not work. Look at the end of the day you need to be right 51% of the times thats it. Timing has been shown to work less that half that in any asset class any where in the world. Do some research guys, figure out some macro stories and play a game that I play with my traders every day. It’s called “what if”.

Example “what if the commodity super cycle breaks down?” answer: short commodity companies"which companies?" and so on. This game played daily based just on the news you read will give you guys so much awareness and “light bulb” moments its not even funny.

Last piece of advice, learn technicals, because very man and his dog uses them. Why? Because they are easier to get than fundamentals. Why do you need to know them? Because just like poker knowing what the other players are doing is the only way to win. How it will help, option strategies can be built around “levels” and so can contrarian trades.

Bottom line, there is no silver bullet people, momentum chasing works this second half of 2010, value picking worked in the first half and nothing worked second half of 2008. You need to know when to use which kind of strategy, timing your strategy selection is far more important than timing entry exits.

I have blown up my fund enough number of times to learn that.


(Donald Francis) #14

Here is the tally for all of Sep from NSE.

Nifty PE managed to stay below 26, but only by so much. October looks set to keep us on our toes, personally I would prefer the markets to consolidate at these levels, but there is no letting go on FII liquidity.

PE crossing 26 would mean going above Median+2STD deviation (extraordinary event). Dividend Yield at 1.03 also is below Median-1std Deviation (an unusual event). The only indicator that still doesn't paint a grim picture is NIfty P/B which is still hovering much below the Median mark. (See the original post for details)

So on 2 out of 3 indicators, the market is going into the danger zone! Watch closely!

Date P/E P/B Div Yield
01-Sep-2010 23.02 3.58 1.11
02-Sep-2010 23.08 3.59 1.10
03-Sep-2010 23.05 3.59 1.10
06-Sep-2010 23.46 3.65 1.09
07-Sep-2010 23.58 3.67 1.08
08-Sep-2010 23.59 3.67 1.08
09-Sep-2010 23.73 3.69 1.07
13-Sep-2010 24.32 3.78 1.05
14-Sep-2010 24.47 3.81 1.04
15-Sep-2010 24.74 3.85 1.03
16-Sep-2010 24.61 3.83 1.04
17-Sep-2010 24.84 3.87 1.03
20-Sep-2010 25.25 3.93 1.01
21-Sep-2010 25.37 3.87 1.02
22-Sep-2010 25.29 3.86 1.02
23-Sep-2010 25.16 3.84 1.03
24-Sep-2010 25.41 3.88 1.02
27-Sep-2010 25.48 3.89 1.01
28-Sep-2010 25.45 3.82 1.03
29-Sep-2010 25.29 3.79 1.03
30-Sep-2010 25.46 3.82 1.03




(Vinod MS) #15
[quote="Donald, post:14, topic:259065851"] > Here is the tally for all of Sep from NSE. > > Nifty PE managed to stay below 26, but only by so much. October looks set to keep us on our toes, personally I would prefer the markets to consolidate at these levels, but there is no letting go on FII liquidity. > > PE crossing 26 would mean going above Median+2STD deviation (extraordinary event). Dividend Yield at 1.03 also is below Median-1std Deviation (an unusual event). The only indicator that still doesn't paint a grim picture is NIfty P/B which is still hovering much below the Median mark. (See the for details) > > So on 2 out of 3 indicators, the market is going into the danger zone! Watch closely! > > Date [/quote]

Dear Donald,

Your anaysis of Nifty PE is very interesting and will certainly be a very good entry-exit strategy for Nifty based fund and blue chip investments. But how about stocks like Mayur Uniquoters or Lakshmi Energy? Many small caps found and researched in the ''not so hidden gems'' section are in a life cycle of their own isn't it? Even at a 28 PE level does it make sense to exit these?

Rgds

Vinod

original post Link: ../ P/E P/B Div Yield 01-Sep-2010 23.02 3.58 1.11 02-Sep-2010 23.08 3.59 1.10 03-Sep-2010 23.05 3.59 1.10 06-Sep-2010 23.46 3.65 1.09 07-Sep-2010 23.58 3.67 1.08 08-Sep-2010 23.59 3.67 1.08 09-Sep-2010 23.73 3.69 1.07 13-Sep-2010 24.32 3.78 1.05 14-Sep-2010 24.47 3.81 1.04 15-Sep-2010 24.74 3.85 1.03 16-Sep-2010 24.61 3.83 1.04 17-Sep-2010 24.84 3.87 1.03 20-Sep-2010 25.25 3.93 1.01 21-Sep-2010 25.37 3.87 1.02 22-Sep-2010 25.29 3.86 1.02 23-Sep-2010 25.16 3.84 1.03 24-Sep-2010 25.41 3.88 1.02 27-Sep-2010 25.48 3.89 1.01 28-Sep-2010 25.45 3.82 1.03 29-Sep-2010 25.29 3.79 1.03 30-Sep-2010 25.46 3.82 1.03




(Amit) #16

I too think that the analysis of entry/exit levels for NIFTY is incomplete without taking GDP into account. Thus what one should look at is (P/E) divided by GDP growth that year (or expected GDP growth).

The GDP factor itself will justify about 10-12% premium. The greater than before FII inflows due to quantitative easing 2, and ridiculously low interest rates abroad will add to this premium, i think.


(Ashish Patel) #17

Some points - About the GDP being low then and GDP being higher now… This would have already been priced in the EPS right?

The issue with this model is that it uses backward Price to earnings and not forward. So now all the results are flowing and if they beat all expectations, the earnings will increase and the P/E will fall and hence will come down in the range of non heated zone (if I may call that :P)

I will follow the model, but look at it closely during the results season to see if there are any issues. But it does give us a good signal to be cautious.

Along with this we will need to look at the growth of EPS. This quarter may be good for many, but with rupee going strong, interest rates moving up, the results may dip in the near quarters.

Ashish Patel


(Donald Francis) #18

@Manish, Amit & Ashish

All valid inputs. This model is only one indicator among many. When we really see most or all indicators converging, that is the time to panic. Even in this model Div Yield & P/B indicators currently do not indicate extraordinary valuations.

For me subjective indicators will probably carry the biggest weights -like retail frenzy seen everywhere, daily newspaper (not the business dailies) headlines carrying Sensex stories, IPOs getting high ratings & valuations mostly on hype (less substance), etc. Till then we should watch closely and keep recording for posterity:))


(KALPESH DESAI) #19

Dear Donald

Your analysis of the history for entry & exit is good with numbers in perspective which you have put up. The comfortable PE of the past always 14-15 bracket even in hindsight. However median plus 2 or 3 times based on Bell curve is a bit alarmist in nature particularly when it is a known fact that Stock Markets dont follow bell curves.

Here is a copy from an analysis made by Clifford Short on how Modern Financial Analysis which includes Bell curve (Normal distribution) fails for Stock markets.

From 1916 to 2003 there should have been 58 days when the Dow Jones Index Average moved more than 3.4%. There were 1,001

  • There should have been 6 days the Dow swung beyond 4.5%. There were 366.

  • Dow swings of more than 7% should have come once every 300,000 years. In the 20th century there were 48 days of swings exceeding 7%.

  • In August 1998 there were 3 trading days where the Dow dropped 3.5%, 4.4%, and 6.8%. According to our current standard models the 6.8% drop should only happen 1 in 20 million. âIf you traded every day for 100,000 years, you would not have expected that to happen once. The odds of having those 3 declines in one month: 1 in 500 billion.

  • In 1997 the Dow cratered 7.7% in one day. The odds: 1 in 50 billion.

  • In July of 2002 the Dow declined sharply three time within 7 trading days. The odds: 1 in 4 trillion.

  • On October 19, 1987 (âthe worst day of trading in over 100 yearsâ) the Dow fell 29%. The odds; 1 in 10 to the 50th power— âa number outside the scale of natureâ.

Corporate earnings of well managed companies in India will typically be minimum 2 times of the expected GDP. Going by your analysis the 14-17 bracket reflects a historical GDP growth of 7. Looking on a forward basis, if we are go by the efficient market theory, we should find mode settling at 18.

The markets have sold off whenever an adverse event has happened in the years cited by you. Event risk are normally preceded by noise. Event Risk & High PE (Median +2 STD DEV,does not mean it is expensive) based on historical data shows deep corrections. High PE’s (Median +2 STD DEV) without event risk has not resulted in deep corrections. Corrections which result in frontline indices moving down & adjusting at a level must not be used for timing exit of your portfolio whose characteristics may only partly match with the Nifty 50 or BSE 30.

I think the BCG matrix taught cursorily in B schools evenif a bit outdated may help. If you can correctly plot & track your stocks movement regularly in-terms of Stars, Cash Cows, Dogs & Question Marks within the sector they operate & amongst sectors in your portfolio, along with intrinsic stock values relative to the market prices, you will be able to time exit & entry of your stocks.


(Hitesh Patel) #20

I was just looking at the daily charts of the nifty index. It is undergoing a sharp correction and now the question on everyone’s mind is where to look for support?

The whole move from the low of 4786 on 25 Oct was a very sharp rally which went all the way up to a high of 6338 on 5 Nov and has been correcting since then. The rally helped the index break out of a parallel upward sloping channel and achieved the channel breakout targets. Now the tops of the channel make a trendline which offers support in the region of 5750. Again the whole rally from the oct low to the recent high will be retraced around 38.2% (which is an important fibonacci retracement level) at the level of 5750 or so. So first support which can come would be around 5750.

If this does not offer support then next support for the rally can come at around 50% retracement level at around 5560 levels. The 200 day exponential moving average which has offered good support earlier on severe falls is around 5510 currently.

Below this around 5400 is the 61.8% retracement level to the above rally which is again a support point.

Another scenario we might have is we could rally from the 5750 or higher support zone and form a lower top below 6388 only to fall again and test the level of 5500-5550 or so in what is called an a-b-c correction where the current fall can be an a wave, the rise which I mention could be a “b” wave followed by a c wave.

Lets see how the scenario unfolds. Anybody with views invited because nobody knows where markets go but it could be interesting to test the theories put forward by various technical and fundamental experts.