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

(Lotus) #769

There are plenty of reasons to justify 27 P/E. Just for argument sake, I wanted to list some of the reason for being cautious.

Following two charts need to watched for next 6 months. If the trejectory continues as it seems, it is not the question of if, but when (the market will correct)

  1. 10 G- Sec yield - hardened by 1% in 5 months.

  2. Oil price has gone up by 45% in 6 months.

Love to hear counter arguments.

(bharat.jain) #770

Another issues that can warrant a correct is

  1. Banks increasing interest rates. (Today’s news For 1-year term, PNB has increased the rate from 5% to 5.7% on bulk term deposits,
  2. Real estate players become aggressive as they would be now comfortable with RERA.
  3. FPI withdraw large sums if US becomes aggressive in there interest rates (but they are worried about inflation.
  4. Lots of state elections this year deciding
  5. Modiji would like to keep inflation under control for 2018 so to win election otherwise price rise will sure shorten his party so RBI may actually suck liquidity.

Others please contribute. 2018 looks to be a volatile year.

(Amit Jain) #771

Most notable point here is the state elections.

In the recent Vidhan Sabha elections in Gujarat BJP was, at one point, losing to Congress the reason why the market opened 900 points gap down. Although, BJP won with 99 seats, down by 16 seats from 115 won the last time.

Gujarat is the fort, home-ground of the kingpin. Therefore, one expects BJP to face tough competition in other states. Markets is highly likely to account for this change and cause a shift in sentiment.

This can prove detrimental because markets are rallying on sentiment, and not fundamentals. And if the sentiment is diluted, then what will support the market? FII too are net sellers this time around!

Add to it the increasing interest rates and increasing crude prices, I wonder what 2018 has in store.

(vaibhav) #772

Banks have raised so much money (relative to their book value) through qips this year at these high valuations that after some fall from top, they would start looking attractive.

(Amit Jain) #773

Not only banks, if one classifies India as one of the top growing nations then all financial institutions be in Banks, NBFCs, HFC, Infra Finance etc have an opportunity. Like what tyres are to cars. Investors hv to find the ones with a sound management.

(Ludo King) #774

So, 5% (2 x 2.5%, if I remember correctly) of realized loss vs. X% of unrealized gain lets you sleep like a baby? How much tax would you pay for the gain if (and when) you realize it? How about time value of (lost vs gained) money? And brokerage commissions? Putting more good, after-tax money after bad ideas isn’t good risk management. Many professionals use options for hedging, but most of them fail to beat the market for the same reasons, no?

There are better risk management ideas which don’t involve taking X steps forward + 5 steps backward. Margin of Safety, Circle of Competence, Diversification (to some extent), Position Sizing, Debt/Equity Balance etc. are some of them.

(newone) #775

How to know the current EPS of Nifty? The following article from moneycontrol website talks about EPS of 577 for FY19 assuming 20% growth. Does it mean the FY18 EPS (Mar 2018) will be 480?

(sarangg) #776

I plan on keeping my gains till they come under LTCG, (which they will before the next puts expire), so 0% tax. I’m not sure what you mean by time value of money in this case, since its only 2% of capital so at a 10% Cost of Capital, its negligible (~0.2% of capital). As far as peace of mind goes, I would probably be 100% in cash at these valuations, so I consider any return above cash (~7%*3/12 == 1.75%) to be great. Since I used Zerodha, commissions totaled to ~Rs. 200, pretty much 0 relative to my PF.

I am not giving you any recommendations for what to do your own money, I just felt like sharing my strategy on this forum. I am happy with my holdings - they are a diversified set of undervalued companies trading at a large discount to the broader indices. As far as debt/equity balance goes, its hard to achieve any returns close to this with any meaningful allocation to debt (~20% or above), while lower allocations don’t save you in a broader market decline.

As far as putting good money after bad ideas, the quality of ideas lies in the beholders eyes. You can manage your own PF risk as you feel comfortable :slight_smile:.

(kapildhaka) #777

Hi, where can we buy put call which are due in dec 18? I thought we can only buy options for current and next months only?

(sarangg) #778

btw - many well known value investors/hedge fund managers such as Seth Klarman, and Prem Watsa are known to use derivatives as hedges and to magnify returns. I can see how you would have a bad opinion of derivatives given they are usually used for speculation, however, there are times where they can be valuable for any absolute return oriented investor. You should read Joel Greenblatts’ “You can be a stock market genius” to see how long term options can be used in a value approach.

@kapildhaka You can find them on zerodha under “NIFTY18DEC series” and use the NSE website to check out the option chain.

(Ludo King) #779

I am not totally against Options as you suggest. There could be situations where Options will help…buying index Put Options to hedge the stock portfolio is not one of them (for reasons already elaborated in my posts above). These crutches are for folks who don’t know what they are doing, IMHO.

Thanks for mentioning Joel Greenblatt’s “You can be a stock market genius” book, which I happen to be re-reading this week. He recommends buying LEAPS and Call Options for special situation stocks. He suggests that buying LEAPS and Call Options could provide some advantages & leverage (instead of directly buying the underlying stock) when the date for special situation event is known (very important to ensure time value decay is minimized). These are stock Options, not index Options. BTW, stock-specific LEAPS and long-term Options don’t exist in India. Only short-term stock options exist, but they are illiquid for most stocks. I am attaching the relevant pages (with my highlights) for other forum members’ benefit. LeapsAndOptions.pdf (1.4 MB)

BTW, there’s a free offer coupon for Ginsu Knives on the chapter’s last page (see PDF). Greenblatt has a snarky sense of humour, don’t you think? Good luck for 2018.

(Amit Jain) #780

Written in 2009… Still makes sense to me.

The writer expresses regret for having held his entire PF in 2007-2008 fall. He dearly wishes the gods to give him the rigidity to follow the wisdom of Nifty PE Bell Curve.

(manivannan.g) #781

Ok. Now the million dollar question is what’s the stance of the author? Has he exited most of it ? :slight_smile: or changed the strategy ? As per NSE, the current PE is 26.70.

PS: May be the top contributors (@Donald @hitesh2710 ) can shed some light here. Since the thread might be outdated or if they’ve updated the strategy and posted somewhere in the thread, please help to pin it for new comers.

(Amit Jain) #782

same arguments, different times.

In reality the PE Bell curve does not change much.

Back in 2010 Donald turned seller due to high Nifty PE, but other participants were putting up reasons to hold on to the stocks just a few months more.

From subsequent posts, I gather that back in 2010 FII were pumping in money. Which could hv been the reason why in 2011 Nifty became PE < 17 without a crash.

This is bad news for us in 2017, because now FII are net sellers. This happened only in 2008-09 bear market because of Lehman driven worldwide panic to get back the cash into the US economy. However, in 2011-12 and 2015-16 FII were still buying, so the fall was fairly cushioned.

(Amit Jain) #783

Donald did indeed want me to come back and read what he had written… :slight_smile:

(Amit Jain) #784

About a year from when Donald raised the alarm… Hitesh updates us in middle of the bear market.

(Amit Jain) #785

This was the last post from Mr.Vachhani…

Moreover, there was no post made on this thread for three whole years!


Hello @manish962 , can you let us know how you arrived at 6300 level at that time to decide on “start selling seriously”?
I am dumbstruck to see that your figure of 6300 was spot on! How do you do that?

When I look back at the history / charts, there seems to be a market fall which looks like being triggered when it touched 6300 in October 2010. Next month in November 2010 also it went slightly above 6300, but then the downfall continued.

Being new to this analysis, I would appreciate detailed calculation / explanation.

(Manish Vachhani) #787

Do not take my words seriously as most of the times I may have gone wrong. Predicting future trend is always a shot in the dark and has some probability to hit the bull’s eye.
For this particularly instance, the previous high of 6300 was a possible target for the bulls and it also provides the resistance. At that time nifty RSI was high(78-80) which shows bulls putting all the weight to take the nifty to the new high and while doing so they spent all the energy. So only possible scenario was a side way consolidation or a downward trend. So it consolidated for some time but during that time RSI moved down and hence the downward trend followed.

(J2EE Professional) #788

how would you use LEAPS in the indian markets?