Weekly Market Recap
Markets Rebound sharply after last week’s pullback just before the earnings season kicked off and attained its highest ever closing on a daily and weekly basis. Though it was quite a volatile week with sharp pullbacks during the middle of the week, however, bulls managed to tighten the grip and took the indices to a higher level. Once again, the major contribution came from IT stocks followed by heavyweight RELIANCE.
In the week gone by the benchmark, SENSEX surged whopping 1293 points, or 2.20% to close above the 60K mark at 60059. Similarly, NIFTY gained 363 points, or 2.07% to close at 17885.
Current Outlook
Fundamentally, the PE ratio or earnings multiple of NIFTY had reached an all-time higher reading at 42 in late February, however, after two-quarter of a good set of earnings it has come down at 27.4 9 (currently) which is still on the top of the range. Historically, this ratio has usually remained below the top of the normal range; however, since the last two decades, it has not been uncommon for the price to exceed normal overvalue levels, sometimes by a lot. I think the market has been mostly overvalued since 2003, and it has hardly been undervalued since then. We could say that this is the “new normal,”. However, the sharp knee-jerk reaction has been quite evident when the price remains above the overvalue levels for a longer period.
The earning season has kicked off and will define the earning multiples. The IT bellwether TCS has delivered stupendous earnings, let see how the market will react on Monday as good earnings have mostly been discounted by the market. Good earnings sometimes are used as an opportunity for profit booking by the smart investor. We have witnessed the phenomenal rise in stock prices among all the major sectors that have contributed to the indices. Most of them have risen precipitously. Any disappointment may invite a rebound in prices, while the positive surprises may further fuel up the rally as momentum is clearly on the higher side.
The outlook continues to be in favor of bulls, but much will depend on the earnings.
Conclusion
The market continues to be grossly overvalued. Even though earnings are projected to move higher, it won’t be nearly enough to get valuations back into the normal range. However, provided the expectation is high we should be prepared for any negative surprises or profit booking which normally occur after good earnings.
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Be Patient…; Be a Savvy Investor..!!
Pankaj