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

[jamit05]

@am648

Not sure what makes you feel those were bull market corrections. For instance, between the peak of jan 2010 and the trough of August 2013, the small cap index corrected by 50 percent.

This is turning into a fruitful discussion.

Small Cap Index is volatile, hence its levels are less reliable in comparison with Nifty 50 for gauging the “heatedness” of the investing environment. Therefore, I study Nifty 50.

Lets look at the retracments.
Nifty’s price movement under discussion is:
2009 lows 2600
2010 high 6300
2011 lows 4600, note, this retracement was gradual enough to just graze the 200 EMA weekly. The monthly chart too was tranquil.

Compare the above with:
2009 lows 2600
2020 highs 12200
Current low 7900

The quality of this leg is murderous. Monthly candle is full bodied and is flush with momentum. And the environment is warranting it. 200 Weekly EMA is totally destroyed, as if it didn’t exist. just like in 2009,

Therefore, I think that this is as a Bear market start and hence this move will be sustained and will go deeper. SP500 has already made fresh lows.

But, this does not affect my buying plans.

@am648

However, there is a reason that almost every single professional investor advises against it.

Professional people have ulterior motives. They will NOT want you to buy and sell at extremes, as they come only 20% of the times. They want people to feed their financial-machines 99% of the times. Devils in suits.

Timing is tough if you are aiming for the absolute extremes. Otherwise, its not. My approach is to buy at average PE, which I peg at 18 to 20 as per the Histogram. This happened 3 days ago, and now I am in buy mode. Placed my first order to buy HDFC Bank at its 52W Low of 795, which is a 40% correction from the top.

@jamit05

Let the games BEGIN !!

I will be in buy mode as long as Nifty remains below 20, above which I classify the environment as frothy, which would force me take higher risk as compared to the returns (and my troubles).

@am648

Hope you see where I am going with this. But I would be happy to hear to hear how you plan to safeguard against opportunity cost of being underinvested if and when market bounces.

Sure, my approach carries a risk of remaining under invested. That is nothing new, being an investor is like the M.Rafi song

"Rahi manwa dukh ki chinta kyu sata ti hai…
Dukh toh apna sathi hai…

Sukh hai ik chao dhalti…
Ati hai jaati hai…

Dukh toh apna saathi hai…"

I mean, risk is always going to be there, in action and in inaction. If one buys all at one go, then there is plenty to lose as well. There is risk both ways.

I feel, given the current setup, the risk reward ratio will be in my favour if I buy gradually over the next one year. I am willing to take that risk, as opposed to buy everything next week.

The bear markets not only give your good prices but also filter out the bad stocks.

“Only when the tide goes out do you discover who’s been swimming naked.”

Yes Bank was on my list of buys.
Bajaj CP has corrected way below my target buy price.

[Rits]

Where Nifty bottoms out even in the worst of times, according to history

[Ediacaran97]

What do you think about the bombed out sectors? I mean the Corona scare has decimated some sectors like airlines, travel, tourism, casino, commodities. The fall has been vicious - the pull back rally will be equally ferocious if there is an abatement of Corona infection numbers, decreasing death rates, vaccine against the virus etc. Isn’t the risk- reward ratio in an investor’s favor?

[jamit05]

Sure, one could take short term positions at deep discounts. Someone interested in this line of thought should probably start a thread.

It would be profitable.

SpiceJet
Jetairways
Manapuram finance

Could give good short term profit.

[deevee]

Hi

Today we saw the greatest fall in the Nifty since 1 Jan 1999.

3 of the greatest top 10 falls have happened within 8 trading sessions this month!

Nifty PE as reported by NSE is falling.

When a pendulum swings it doesnt stop midway.

Stay safe both in life and in the market.

Rgds
Deepak

[SUNRAY]

@deevee,

Thanks for posting!
Sorry for the questions in advance, I am super curious to get your thoughts on the below:

Don’t you think that the Nifty50 has been heavily manipulated show growth? Would this chart overemphasis the drawdown? Or am I thinking more of the Sensex? Would it be better to map out the 500 instead?

Thanks!

[deevee]

Hi @SUNRAY

Any index is at the end of the day a momentum portfolio if you think of it. Certain fixed number of stocks, a criteria for weight age & a rule for entry and exit.

N50 or N500 doesnt matter a lot actually. I looked at N500 data sometime back and the trend is the same.

Please note this method is to serve as back of the envelope calculation to maintain equity debt allocation. It is no way set in stone. The principle is mean reversion. We fill in stories to that reversion because as human beings we like linearity. This time the story is COVID19. If there would have been a reversion due to some other reason we would have said that.

Nothing complex to read into this other than laws of reversion.

I hope this answers.

Rgds

[pratikiitb]

Thanks @deevee . One probably naive question: the PE here takes into account the current price and past earnings - am I correct? My concern is that the current earnings will obviously deteriorate as well. So are we are observing the true PE above?

[jamit05]

Allow me to try and answer this question on DVs behalf.

This data set is taken directly from the NSE website to ensure the consistency and dependability.

There could be other and better data sets but NSE data has been taken for simple reason of ease of availability.

There are almost 4000 data points that make that one single picture. This data points cover Good Times Bad Times severe Times with varying pace of earnings.

Its all in the curve, and it’s dependable, not to time the market, but to gauge the “temperature”.

[jamit05]

Nifty has climbed a 1000 points after making a bottom of 7511. This comes along with some supportive and positive announcements from the world governments. Most notable being the financial package declared by US of A of $2 Trillion, this will go a long way in arresting the fall. In fact, i think the market will not fall with the same speed anymore. The VIX is likely to reduce now.

Lets run through the Possibilities, and their probabilities:

1. The best and most desired one: There is a v-shaped recovery.

But, that would mean that the all Covid issues are at rest, and they do not bother the market anymore. Seems unlikely, but a possibility. Unlikely because most of the world has not reached Phase 3 yet, where the rate of infections really take pace, and numbers start to bother you.

2. Market consolidates for a few weeks and touches the 7511 low but is unable to make and sustain a naked lower weekly close.

This would mean that the market has factored in the worst outcome, and bulls are waiting for a flag-off from the authorities. I feel this is very likely, because of the packages.

3. Fresh lows are made; 6800 and then 6000 gets tested.

This too is a possibility, but even if the fall comes, it is going to be at a much slower pace, inter-laced with sharp run-ups, revealing the onset of bulls.

Market, as we speak is up 1200 points from the bottom of 7500. However, this could very well be a knee-jerk reaction after touching oversold levels.

In summary, I think with the momentum Nifty has gained, it is almost a certainty that it will touch 7000 levels. And it would be a good time to buy when Nifty touches 7500 again, and keep buying in tranches at lower levels.

[gautham1]

A lot of companies hit upper circuit today. I understand they have already fallen a lot. But the upper circuit is a surprise. Have things got better ( company specific or overall) ?. No. Most of the companies cant be considered very good companies either. I am curious why a company hits upper circuit. How is it possible that there is not a single seller?
Can someone help understand the dynamics behind an upper circuit?

[arunjacob]

its due to short covering . March expiry is on 26th . This is temperory & from monday onwards , my assumption is market will start falling again.

[embtux]

Nice analysis @jamit05 !

I’m also agree with @arunjacob.

I would like to add one more point here -

Noticed anything?
DII & FII both were net sellers today!
Seems like a number of ‘impatient’ retail investors got trapped today.

[arunjacob]

@embtux Where do you get this information of fii & dii buy/sell details in this chart format?

[hakim_yamin]

From stock edge app ,there you can get all fii dii deta

[embtux]

@arunjacob,

StockEdge app

[gautham1]

I was not talking about F&O stocks.

[jamit05]

This does not exactly qualify as Retail investors being trapped due to FII and DIIs being net sellers.

26th March was Monthly expiry, a time when positions have to be rolled over to next month. This may have caused this anomaly.

@jamit05

2. Market consolidates for a few weeks and touches the 7511 low but is unable to make and sustain a naked lower weekly close.

This would mean that the market has factored in the worst outcome, and bulls are waiting for a flag-off from the authorities. I feel this is very likely, because of the packages.

3. Fresh lows are made; 6800 and then 6000 gets tested.

This too is a possibility, but even if the fall comes, it is going to be at a much slower pace, inter-laced with sharp run-ups, revealing the onset of bulls.

I am mostly looking out for case 2 to pan out. This is being supported by the fact that the intraday volatility is significantly low in Up-moves, and increases in Down-moves.

[vasuadiga]

If you are alive 60 days from now, you will regret losing the equity...

I did buy a lot in March 2020…but I am having second thoughts after seeing Basant Maheshwari in the same boat.

[jamit05]

This is the wittiest, and most honest post I’ve seen in a while.

The ones who have bought seem to know for sure that they jumped in too early. And ones who haven’t bought at all are sitting eagerly, with some regret, for recent lows to be touched… Anybody with me in this boat?

Edit 1: Looking to get into a Bank or two, handful of financials, IT. That’s it.