Weekly Market Recap
The week that finally bounced! that too sharply. It is always difficult to buy the stocks near lows except few as we afraid of further drops. And I think that was the case for the bounce we experienced this week.
The benchmark Sensex witnessed a sharp surge and ended the week with 1662 points, or 4.98% gain to settle at 35011, similarly Nifty50 gained 523 points, or 5.21% to close at 10553.
Current Outlook
Last week I was expecting that major indices will break down below march 2018 low, but it didn’t happen; in fact the rally we have seen caused a ruckus. Market breadth was also quite strong during this week along with deterioration in VIX (volatility Index).
Charts of fundamental data are as useful as price charts in helping us visualize fundamental context and trends. In the case of earnings, the following chart shows us where the NIFTY50 would have to be in order to have an overvalued P/E of 24; fairly valued P/E of 19.55, or an undervalued P/E of below 15. Currently, price is well above the tradition value range, now at 25.4 post correction and bounce-off. I believe assuming no major price advance or decline, and assuming that earnings projections are relatively accurate, price will be back within the normal range sooner or later. Since 1999, NIFTY50 is hovering above and below the average P/E of 19.55. However, the extended time period to stay above average of 24 is since mid 2016 till date.
If the earnings are expected to improve going forward, but the drop in P/E shown is only possible if price doesn’t change significantly, which, of course, probably won’t be the case. And in this scenario, the market will still be very overvalued.
Conclusion
The NIFTY50 is well above the normal range and is over-valued. Historically, over valued conditions leave the market vulnerable for a large correction or bear market. The current condition in the aftermath of bounce back is not a signal for immediate action, rather, it is part of context in which we should view the market during the process of making decisions. So let’s keep in mind that valuations are working against us.
Feedback, comment or questions are welcome.
Happy Diwali…!; Be a Savvy Investor..!!
Pankaj