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


(bharat.jain) #810

Point is interesting. S&P 500 bell curve was same for nearly 100 years (till 1990). After that 2000 looks more like an aberration and slowly its getting back to the old bell curve. Interesting to note that except for few humps there is not much PE expansion on the long term also. If history is to repeat itself after 1929 next major PE event came only 7 decades later.

Another interesting thing to note is that if its S&P 500 or Nifty the PE stays in the 14-25 range for most of its life.

For my own personal view. I will consider PE 26 as exit levels for now.


(AbhijitMani) #811

This graph beautifully captures the inverse relation between PE & interest rates.
Almost all the times( except in the 1950s & 60s), the directional change in the interest rate ( Up or Down) has accelerated the decrease or increase in long term PE ratios .
So we should closely watch the bond yields & interest rate trends ( I feel that may be a better predictor about the future trends as far as the PE levels are concerned )


(pkk123) #812

While you have made a seemingly good argument, I am not sure bell curve can be applied to market PE over a period of time. What if there is a secular shift in PE range? As an example, Scientific American says that “over the last 150 years the average height of people in industrialized nations has increased approximately 10 centimeters”. Now if you were to take a random sample of 1000 humans from 19th century and 21st century, their heights will still form a bell curve but the actual height on an average is up 10 cms. I wonder if post 2014, we have reached a stage where average PE will shift up a few points? If yes, all your calculations will remain valid (for past data) but won’t apply to the future.


(pkk123) #813

Furhter, please look at this chart

Both times when Nifty PE went 2 SD above normal, it started 2 SD below. But this time it only went 1 SD below (mid 2013) and then went straight to 2 SD above. Is that an indication of PE range shift?


(bharat.jain) #814

My takeaway is that it will be more or less a bell curve with crest and thorough changing for that particular cycle. Sometimes it can be flat otherwise steep up and down. There doesn’t seem to be a point finding a median. Interesting is that range of 14-25 is where it spends most of time


(Yogesh Sane) #815

There is a trading folklore that says don’t look at the level of an average line but instead look at the slope of that line. Essentially look at how fast the line is moving and not where it is.

When I look at the long term PE chart, whenever the PE has shot up, it pulled back sharply. On the other hand steady climb was followed by a steady drop. Current phase looks more like a steady climb than a rocket launch. PE is mean reverting so there is no doubt we will see a PE of 20 in future. Sooner or later is the question and how will we get there. A sharp pull back or a steady drop? With earnings expected to pick up and liquidity indicators signaling huge liquidity in the system a sharp pullback anytime soon is unlikely.

I have never seen a bear market start when GDP & earning growth is picking up and market is awash with liquidity. Its when high growth meets with high PE that makes a top. I only see early cyclicals reporting good growth now. When late cyclicals start reporting strong numbers, it will be time to step back.


(Kumar Saurabh) #816

The last paragraph of yogesh is very critical n Crux of debate . n numbers can be deceptive if science behind numbers remains Mistry.


(Prasad India) #817

Dear Yogesh,
Good observation.
Please elaborate on late cyclicals.
Prasad


(Amit Jain) #818

My immediate response would be that, by its very nature the market is not bound by rules. I will try and back this comment up with numbers from the past, if i can.

Illogical is also very likely to happen.


(Amit Jain) #819

SnP swift move on monthly chart from 2000 to 2744… very quick. Almost as if it was intentional.

Point being, there isnt a single swift move in Snp chart of past twenty years, that has not been reversed.


#820

Hi Yogesh,
You have made an important point and very interesting observation. Waiting to learn as the time goes by whether market responds to earnings growth and GDP or will the mass behaviour pull the market in bell curve.

Can you explain this in detail? I did not understand this.


(josephseby) #821

Hi,
I have plotted a chart of ROEon a quaterly basis. I took ROE as EPS/ Book Value which is not exactly correct but will give a rough estimation.


It is presently running below its 7 yr average from 2009 onwards.The dotted line in the average curve i just extrapolated the slope of the curve. My point is that how long the earnings can remain in the lower side. There has to be atleast a mean reversion.


(pkk123) #822

Once again why should ROE be a fixed number and not a function of interest rates?


(Amit Jain) #823

You put it in one simple line.

Most here are justifying this the current situation based on future expectation that the GDP growth will resume and the earnings will pick up. The Growth has been shrinking since 2008. It has been ten years. What are the chances that the desired change will happen in 2018.

What if the economic growth recovery does not happen in time. How low could the market go?


#824

Sometimes we should see the chart upside down to shift our biases…if the below chart isn’t a great time to buy (for value investors), what is? If the current PE were 5 to 7 points below the historical median, wouldn’t we be buying? At least, we would start buying in a phased manner, wouldn’t we? If yes, why not sell in a phased manner during this bull market?

When the markets are going up, forecasts are always rosy; the opposite is true during bear markets. Don’t believe me? Read some headlines when Crude Oil was near $27 / barrel in 2016. It was as if the inventories would continue to pile up and Oil was headed towards single digits! Oil producers themselves were getting ready for $20 a barrel.

I leave you with some quotes from The Little Book of Behavioral Investing:

From a survival point of view, a false positive is a better response than a false negative. Emotion is designed to trump logic.

Some 70 percent of analysts think they are better than their peers at forecasting earnings - yet, the very same analysts had 91 percent of their recommendations as either buys or holds in Feb 2008.

Hope isn’t a good investment strategy.

“Don’t question authority. They don’t know the answer either!”

“Analysis should be penetrating, not prophetic.”

“You can’t predict, you can prepare.”

Disclosure: I am not an investment adviser. My portfolio as of today - 50% equity, 10% gold, 40% cash.


(Prasad India) #825

I am adding few interesting papers on early and late cycles.
For info.late and early Business_Cycle_Sector_Approach.pdf (263.0 KB)
late and early cyclicals FollowtheCycle.pdf (267.8 KB)


(manivannan.g) #826

Though I’m not a big fan of Mr.Porinju Veliyath. But what he says makes sense.


#827

Thanks for the nice graph!

Everybody talks about earnings recovery. But, what is the quantum of the earnings recovery that is expected?

I am guessing the numbers from my visual inspection of the graph. It appears that average RoE for the past 20 years has been ~18.5%. The RoE for the previous year looks is about 14.25%. So, one may think that earning should recover by ~30%, (18.5%-14.25%) / 14.25%.

We should remember that RBI has made its objective to target inflation. CPI for 20 years prior to 2015 was ~7%, the stated target is 4% with a range of ± 2%. If inflation goes down, so should RoE. We should not compare RoE in future with past RoE which was at higher levels of inflation. The expected RoE should now be 3% lower reflecting the decline in inflation (7% - 4%). So, the new average RoE should be 18.5% - 3%, that is, ~15.5%. From the current RoE of 14.25%, the new normal of average RoE is only about 8% higher, 8% = (15.5%-14.25%)/14.25%. So, the earning recovery has the quantum of ~10% and not ~30%.

If my thinking is correct, then I wonder what will happen when market recognizes this. :slight_smile:


#828

During large market declines, illiquid small caps lose ~90% of their value. Then many a barsati medhak (frogs that appear in monsoons) will disappear from news channels.


(Amit Jain) #829

He just says market is bullish because of DII and MF funds. This is one herd which had no Shepard. They all got onto the bandwagon due to Modi factor. Economic reforms are on track… But it takes time.

Every piece of news article is bullish. Market is just waiting for a catalyst. These levels are not sustainable.