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Do the Charts Still Support a 70% Surge?

Jan 14, 2017

In this issue:
» The upward march of Sensex cos' profits since 2000
» All the market action in the week gone by
» ...and more!
00:00
Apurva Sheth, Editor of Profit Hunter

The Equitymaster team has been writing to you about the coming 70% surge to the benchmark indices for quite some time.

Rahul Shah, Co-Head of Research, in March last year, wrote...

  • If profit margins of Sensex companies, which are currently at 12.2%, revert to their ten-year mean of 13.5%, and if EPS grows at its long-term average of 15%, the Sensex could go up 70% in the next two to three years.

His logic is simple. In the long run, stock prices follow earnings growth. If corporate earnings rise over the years, so will stock prices. And if the Sensex hits 40,000, it won't be due to magic. It will be due to earnings growth. Period.

If you've been an Equitymaster subscriber for long, you're used to these objective and rational views based on sound value investing principles. But today, I want to present my views...which are of course objective and rational...but based on charts.

Last year, I shared a bold view with the Profit Hunter and Research Digest (requires subscription) readers. Using charts, I wanted to confirm or contradict Equitymaster's long-term view. I dug deep into the charts to see what they had to say...

All the charts I analysed in April 2016 indicated a strong possibility of a big surge in the markets. As it turned out, markets did in fact deliver. They recovered most of their losses from the 2015 bear market, and the Nifty almost touched the 9,000 mark in September 2016.

However, the recovery turned sour as the markets were hit by the double whammy of Demonetisation and the US elections. Between October and November, the Nifty gave up most of its 2016 gains.

However, in just the last fortnight, they've bounced back. The Nifty is currently trading around the 8,400 mark. Still a way to go to reach the previous highs, but encouraging.

Where does all this leave us? Is the long-term trend violated? Is a major surge in the markets still on the cards?

Let's look at the charts once again.

One Year Price Chart of Nifty
 

Here I have a Nifty daily price chart. At the bottom left, I marked the 2016 low. Markets hit a low of 6,825 on 29 February, Budget Day, and soon began their northward journey.

The uptrend lasted almost seven months until the Nifty topped out at 8,968 in September, a 30% move from the low of 6,825.

Then markets began to trade sluggishly in October, even giving signs of a deep correction. On 5 November, I pointed out the possibility of a 500-point correction to the Nifty in my weekly update to Swing Trader subscribers (requires subscription).

Markets opened with a 500-point drop on 9 November as they dealt with two uncertainties - Notebandi and Trump. They recovered most of the losses by day's end, but the damage was already done. Markets tested lower levels later in the month and in December as well.

If you are new to the markets or charts, then this might look like beginning of a bear market. But that's not the case. If you look at the charts closely, then the move from the low of 6,825 to the high of 8,968 was worth 2,143 points (8,968 - 6,825). Half of this is nearly 1,070 points.

Markets do not move in a straight line. They rise, fall, and then rise again. The intermediate drops are crucial from a long-term perspective. They provide a much-needed breather.

Even in healthy bull phases, its normal for markets to give up 50% of their recent up moves. Which is exactly what the Nifty did from 6,825 to 8,968. You get a price level of 7,896 when you deduct 1,070 from the high of 8,968. The Nifty has bounced back twice from the same levels. This is normal and healthy during a bull market.

So the recent fall post Notebandi does not affect our long-term view. However, it may have implications for the short and medium term trends. I am keeping a watch on these trends and how they will affect the markets in 2017.

Don't worry - I won't keep these observations to myself. In fact, I will be sharing them at the Equitymaster Conference on 21 January, 2017, at the Taj Mahal Palace Hotel in Mumbai, where I will be talking about the markets and my Big Trading Idea for 2017.

You are more than welcome to attend, but I strongly recommend you to book your seat now as space is running out. In fact, a special offer to book the seat is ending at 11.59pm today.

See you at the conference!

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03:05 Chart of the day

Talking about a 70% surge in the benchmark index, here's a great illustration of the how in the long run, the underlying earnings of companies steadily march upwards. Today's chart of the day pegs the aggregate consolidated net profits of BSE Sensex companies since FY00.

The Steady March Upwards of Sensex Firms' Profits


Put this way, you can clearly see how phenomenal this growth can look like over a large number of years. The total profits of Sensex companies in FY00 was just Rs 175 billion. This figure today stands at a grand Rs 2.37 trillion. This, even after the sluggishness in business of the last few years has ensured that earnings have remained stubbornly stagnant in the last few years. This effect too can amply be seen in the chart.

Looking beyond the current down cycle, as corporate earnings rise over the years, so will stock prices. Indeed, a surge in the Sensex is just a matter of time.

04:10

Global markets remained upbeat in the week gone by with a majority of the indices ending in the positive territory. Brazil was the biggest gainer up 3.2% for the week on the back of recovery in oil and commodity prices that will aid in easing recessionary pressures. Backed by the recovery in commodity markets, the World Bank stated that the global economy will grow by 2.7% this year, better than last year's 2.3% growth. The Bank also said that growth in advanced economies is expected to rise to 1.8% in 2017, against an estimate of 1.6% in 2016. Emerging and developing economies growth is expected to accelerate from 3.4% in 2016 to 4.2% in 2017.

Among developed economies, all the European indices reported gains for the week. However, the US markets were marginally down by 0.4%. In the latest economic data, U.S. retail sales rose 0.6% in December, less than had been expected, while holiday sales were up a better-than-expected 4%. Separately, producer prices were up 0.3% while business inventories rose 0.7%. The US Federal Reserve reiterated support for existing regulations on banks and said the U.S. economy faces no serious short-term obstacles.

The Chinese market was the biggest loser after exports last month, fell by 6.1%, more than expected. Even the Japanese index was off 0.9%. But the other Asian indices ended the week on a strong note with Singapore up the most at 2.1%.

Back home, the BSE-Sensex ended in the green and was up by 1.8% on the back of a benign macroeconomic climate. The Index of Industrial Production posted a growth of 5.7% in November after a 1.9% contraction in the preceding month. The growth has come despite a note ban announced in November. Meanwhile, exports continue to increase for the fourth straight month in December, registering a growth of 7.8% in rupee terms. The cumulative exports till December were up by 4.4% in rupee terms. Even retail inflation eased off a bit in December.

The earnings season for the 3QFY17 kick-started with TCS reporting better than expected December 2016 earnings. But the results were clouded by concerns over management after CEO Natarajan Chandrasekaran departed to take over as Tata Sons chairman. Even pharma stocks were hit after Donald Trump's comment that drug makers were "getting away with murder" in what they charge the government for medicines, and promised that would change.

On the sectoral indices front, metal, power and banking stocks led the gainers this week. On the other hand, stocks from pharma and telecom witnessed maximum selling pressure.

Performance During the Week Ended 14th January, 2017

04:56 Weekend Investing Mantra

"Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Apurva Sheth (Research Analyst).

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2 Responses to "Do the Charts Still Support a 70% Surge?"

Penugonda Prabhakar

Jan 17, 2017

Iam Penugonda Prabhakar in Agora in research will come not sensex and Nifty. iam doing shears and business doing ET and Agora. sensex in corection some points came. more not come.Many companys i doing trade.you also Agora in under come.

Yours Lovely
Penugonda Prabhakar

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S K LIMAYE

Jan 14, 2017

Mr Apurva Sheth , let the third quarter earning figures start coming and the picture could change .After all through these columns only you people had predicted a dismal third and possibly fourth quarter for corporates due to demonetisation.

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Equitymaster requests your view! Post a comment on "Do the Charts Still Support a 70% Surge?". Click here!