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

Fatima Jee, as per the attached graph, it seems that nifty may touch the level of 6700-6800. Is my understanding correct or I am making some mistake.

No…its upto 7500 levels aaprox

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Thanks a lot. Being a novice, i don’t understand technical analysis and its nuances…

is this a monthly chart and what is the median point of the pitchfork ? i am just trying to draw it. mine is coming a lot different…any inputs?

Try drawing the pitchfork on semi log (percentage) charts…the results are better

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Thanks Mehnaz Jee for the informative post…

Hello Mehnaz,

Going back to the original model in this thread which suggests to look out for warnings and red flags when nifty crosses 24PE (along with checks on PB and Div.Yield) isn’t it a time to be cautious? Current Nifty PE is 23.34. As Nifty cross 9000-9100, it will cross 24. The rally or bull Market, wont it need support from earnings? or Market has assumed earnings recovery from next quarter and then PE will automatically be taken care of? Following this thread’s model helped me book some profit in last Sep-Oct and get some companies really cheap after Demonetization. Idea is once nifty crosses 24 PE, market will just find a reason to correct which can be anything – Demo, Fed Hike, China, US, State elections or something completely new.

Earlier I used to dismiss TA/Charts completely without giving any thought but I am amused by your work in most of the threads hence the questions. Kindly ignore if my questions are not relevant.

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There is no justification or sound basis to say that at a p/e of 24 markets are looking for a reason to fall. …exceot that markets usually correct for sometime if the p/e goes above 24. This has happened in the past few times…and hence is likely to happen now too.

Pl recognize the basic premise of the above assertion. It is bssed on pattern recognition and repitition.

For a sceptical person like me…who would like to question the basic assumptions of fundamental analysts (although they tend to be couched in appropriate jargon to make them look sound and sophisticated)…the questions that arise are…

Is this the only pattern that works in the market?

Are there any other patterns to predict whether market is due for a correction?

And are those alternate pattern recognitiin syystems too indicating that the market is over bought and due for a steep correction?

First and foremost…the fall and bounce of the market itself is enough to puncture the basic premises of this thread. If the market is soo frothy or overbought at a p/e of 24…then why is it getting support at 22p/e…why are the falls so shallow? Why is it not falling to a " fundamentally reasonable" p /e of 15?

If we apply occams razor, perhaps the simplest and most appropriate explanation is that …its not frothy @ 24 p/e. After looking at the depths of the corrections, how come no boarder has even come close to such a conclusion.

What i am suggesting is that technical analysis has far more rigorously tested pattern recognition / following systems and they are indicating that NIFTY is in a bull market.

You may may or may not agree with tech analysis, but pl do realise that this 24 p/e model is arbitrary and as of now the depth /pattern of corrections clearly negates it.

Since you are not a practitioner of tech analysis, i am not even going into details of why NIFTY is in a bull market.

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It would be almost axiomatic that when ever the bull market ends, it would end when the p/e is quite high…maybe 24 and above…or maybe 30 +…so in a way finally you would claim validation for your premises.

I only find consolation in that…as per tech analysis, the time for steep correction or a bear market is not in the next few months. Thats enough for me…and should be enough for most investors.

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Mehnaz for fact of why at 24 pe and why at 20 pe, you need to see returns, what kind of return you get over 3 year period when investing at 24 pe and when investing at 20 or 22 pe.

Thank you for the detailed reply. I am willing to learn over here. If you see the PE throughout every month since January 99, the pattern seems set.
http://historic-pe-ratio.weebly.com/

More than 24 PE examples.
Jan 2000 26PE → Sep 2001 13PE
Oct 2007 26PE → Nov 2008 12PE
Sep 2010 24PE → Dec 2011 17PE
Mar 2015 24PE → Feb 2016 19PE
Sep 2016 24PE → Dec 2016 21 PE(?End)

You are right that this time correction is shallow and markets bounced back after 22PE. Each time before this, markets went above 24PE in frenzy. It was the only at the end of the rally. Even the big rally from 2003-2007, it was well supported by earnings growth.

This time though it seems different. When I see the above graph, I can see Red color from Jun 2014. PE21-22 seems to be average in last two and half years.
For a beginner like me, I am trying to understand what does it mean. Is the market trying to stay above it’s long term averages anticipating better future prospects? Is the overvalued (higher PE) market a new normal (re-rating)? What should people do with the cash portion they have; invest even if PE is higher or keep waiting for the right time (which may never come)?

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One important thing to take note is the entry of a large number of retail investors in the market through SIP mode in equity mutual funds. It is estimated that an amount of Rs 5000 crores is being invested per month through mutual funds… This might be a reason why market corrections are not so deeper in recent times…

Another angle to be mindful of while generalizing the PE levels would be the correlation with bond yields. Currently 10-y bond yield is ~6.5% compared to >10% in the past as well. So PE is bound to go up to some extent because of decreasing bond yields combined with over or under valuations at different time levels. For e.g. PE for US stocks would be much higher than India due to lower bond yields and similarly for European stocks.

But PE of Dow and other US exchange is not exceptionally higher considering their bond yields

http://www.wsj.com/mdc/public/page/2_3021-peyield.html

The problematic sectors which have dented the Nifty earnings (either directly or indirectly)are mostly Banks, metals and mining, steel and real estate sector.

If you look at the long term charts that i have posted in the discussion thread … Contrarian Investing using technical analysis…you would find strong indications of a turnaround in these sectors.

Now, we should ask a related question…what happens to the NIFTY earnings,if and when the following sectors have a cyclical turnaround?

It appears to me that market is anticipating earnings recovery / turnaround from the said problematic sectors…and thus an earnings growth for NIFTY as a whole.

If you combine this thread with the thread Contrarian invesing using TA, then you too would get an idea as to from where the earnings growth in NIFTY is going to come from.

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And as for those with cash to deploy, they can consider investing in sectors which are undergoing cyclical turn around and stocks where earnings growth is clearly visibly…these can be select PSU banks, housing finance companies, infra finance, stocks related to affordable housing theme, renewable energy, digital india theme, ootical fiber cable makers, select stocks from oil sector…

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Hi Mehnaz Could you pls post the link of discussion thread

Its on valuepickr forum…just use the search option…and you will find it…thread name…Contrarian investing using technical analysis.

We have edited in the specific link.

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  • Thanks
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