Euphoria: a clear signal for impending correction

The markets are already up by 30 % ytd and the current rally in which all the midcaps and small caps are gaining in leaps and bounds . Such inclusive movement by the stock community in general after a sustained upmove of more than a year sounds bit cautious to me .

In general we should keep investing in turn around and high margin of safety stocks .

But one should avoid deploying new capital at such times ,…such times should be judiciously used in finding out new oppurtunities and deciding about the prices to accumulate them instead in participating in the euphoria . Also creating a corpus for the correction will be a good strategy .

views are invited

Hi Ranvir,

Good time to discuss this. There is a thread on Nifty P/E analysis, probably the content there will also help. As per that analysis NIFTY is currently at 18-20 bracket still giving a possible upside of 20%. This table is from that thread.

NIFTY P/E Possible returns
Less than 14 152.10%
14 â16 112.36.%
16 â 18 79.14%
18 â 20 51.18%
20 â 22 21.18%
22 â 24 -14.98%
24 â 26 -32.92%
26 â 28 -36.60%
28 â 30 -40.17%

How did you arrive at the 30% figure for the market? The NIFTY was at 5300 levels in April and went down to 4790 levels later.



Hi Ranvir,

From the time I started investing (Nov’11, almost a 1 year 1 month back), sensex has growth exactly 10% (There have been fall and rise, and stagnation in stock market).

Secondly, one shouldn’t just carried away by the stock price appreciation thing; I would rather be cautious if the (price appreciation - EPS appreciation) changes drastically. If the price of any midcap stock rose by 30% and EPS has just grown by 20%, than I would say PE has rose by 10%, and that might be the risk of loosing money (assuming you have invested at a correct valuation a year back)

At any point of time, one should look forward for stocks which are 1> undervalued or 2> in a solid growth phase and are valued at reasonable price or 3> Have a solid moat, has good growth visibility for next 3-5 year, and trading at a PEG ratio near or slightly higher than 1, or 4> a solid turn-around story. 9There might be few more such cases) Sensex/NIFTY level doesn’t make any input to this methodology of stock investing.

Regarding market mood, I would say it is between mild bearish to mild bullish at times, thanks to policy paralysis, high interest rate regime, high uncertainty in political stability in the center and high aversion of average public to stock market. Once things get in place (say post 2014 election) one can only theorize how much this sensex can go.

Possible returns | â16 112.36.%16 â
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Hi Vinod,

How do you get Nifty PE ? Any website where it is easily accessible?

Hi Gyan,

Here it is

Many guys on TV talk about forward Nifty P/E at 14-15 etc…so don’t compare the above table with that.



Sorry this is the direct link

I think we should ignore PE and look at individual stocks Dow Jones had not moved from 2000 but Apple had delivered very good profits . These opportunities help us to mend our mistakes , we can get rid of our bad stocks .Selling our winners too early is not a good idea.

Although I am praying for a correction so that I can buy more . Stocks on my watchlist are Mayur, HSIL , Dishman, Bajaj Finance, Eicher motors, Unichem , Ajanta Pharma, Wockhardt , VST industries Muthoot Capital services

Seems like the post has caught the eyes of fellow members . Glad to know that.

However i do agree with shashi on his views that good business should be bought irrespective of the market valuations and levels . But we should no forget about the three magic words ‘MARGIN OF SAFETY’.

If the stock price covers the three magic words either in terms of valuations or future growth then by all means we should be buying into the business . however it does happen during times of downturn or the market sentiment turning sour ( which gen happens after a euphoria ) that sometimes gems are avb at throw away prices thus vastly increasing the margin of safety and hence excellent returns .

hence it would be prudent to build a corpus for the correction according to me to gain from theopportunitywhich has high probability ofoccurring.

link Link:

Hi Vinod,

Thanks for the link. I knew about this link, but I am told that this link does not provide right data as it considers only standalone numbers. Now, with many companies having large subsidiaries abroad(Tata motors, Tata steel etc), standalone numbers alone are not sufficient to calculate the pe and one needs to consider consolidated numbers. Do you know any site that provides nifty pe on a consolidated basis?

When analysts are talking of 14-15 pe on a forward basis and 10-12% profit growth, they basically imply a 16-18 pe rangefor nifty and not the usual 18-20 that the NSE website shows.But I would be interested in knowing exact number.

Hi Gyan,

This might be of help. Though you need to work and update the sheet.

** link Link:

Hi Vinod,

Thanks **

** basis?When **

rangefor shows.But number.

Thanks Rudra,

I Will look at filling that excel sheet at some later time.

This graph from safalniveshak site clearly tells us that sensex is undervalued as compared to historic level.

To be fair, I don’t think sensex level makes much difference to us, considering the type of stocks we tend to invest at valuepickr.

Current TTM figure shows (from Capital Market database)- PE: 15.5, Dividend Yield: 1.9%, Price to book: 2.3. The figures are way above the lows attained in Indian markets (30-40%), however they are still 25% below the average values. As a value investors we make a costly mistake-We sell early. We also need to keep in mind that we are coming out of (are we?) one of the worst bear markets. We are still below stock level attained 5 years back on nominal terms- may be around 50% below if we take inflation in consideration. All those investors who survived this market, and still investing have the innate talent to succeed in investment arena.

In my view it is time (am I trying to time the market) to move to stocks which can grow at a decent pace in next 2-3 years, keeping an eye on value and margin of safety. Growth in EPS can provide a cushion in case PE reduces by substantial points. We will not lose money if EPS grows by 25% and PE ratio reduces by 25%. Once we cross the long term average level of the market- TTM PE of 20, Dividend Yield of 1.4%- we shall need to stop additional investment of money in the market, and getting prepared for next bear market.