Nifty Enters Danger Zone: What Next?

Oct 6, 2017

Rahul Shah, Editor, Smart Contrarian

The NSE Nifty 50 index has been acting funny.

Every time, since 1999, it touched a price to earnings (PE) ratio of 25x or more, it then quickly and dramatically fell in valuations.

The market has crossed PE 25x only three times since the turn of the century: at the start of 2000, at the end of 2007, and then again at the end of 2010. And it has never spent more than a quarter above this level.

Every single time, within the quarter of hitting 25x, the Nifty collapsed.

What is the Nifty's PE today?

It's 25.75x.

And guess what. It has just a week left before it will have finished a quarter above the 25x mark (it first touched this level in mid-July).

Here's how this looks on a chart:


Does this mean a swift, sharp fall is due anytime now? Will we be in the midst of a full-blown market crash in a few months?

A contrarian would be inclined to believe so. In which case he would sell all his stocks and head for the exit.

But then again, while '25x marks danger' has been the pattern in the past, doesn't mean things will play out the same this time around too.

While a contrarian would head for the exit lock, stock and barrel, a smart contrarian on the other hand would not. He would correctly reckon that while the odds are in favour of markets going lower from this point, this is no certainty. The markets always have a way of surprising everyone, and they may remain at these levels for much longer, perhaps even rising much higher before there is any meaningful crash.

Thus a smart contrarian would take a much more nuanced approach in today's markets. Rather than moving out of stocks completely, what would be a much wiser thing to do is to tweak the stock/bond exposure in one's investments to suit the odds the current stock market presents.

Do this well, and you will come out tops whichever way the market moves in the coming months.

Good investing,


Rahul Shah
Editor, Smart Contrarian

Brain Food for the Day

World Investor Week

Do you know that 2-8 October 2017 is World Investor Week (WIW)?

This a week-long, global campaign promoted by the International Organization of Securities Commissions (IOSCO). Its aim is to raise awareness about the importance of investor education and protection and highlight the various initiatives of securities regulators in these two critical areas.

IOSCO securities regulators and other IOSCO members on six continents (including India) will provide a range of activities, such as launching investor-focused communications and services, promoting contests to increase awareness of investor education initiatives, organizing workshops and conferences, and conducting local/national campaigns.

Head to its website at www.iosco.org to know how you can make most of its initiatives. And you can find Equitymaster's learning courses here. After all, educating yourself about investments is the smartest thing you can do for you financial well-being.

Recent Articles

Electric Vehicles: The Final Piece of the Puzzle October 16, 2017
Just as there would be gainers from an electric vehicles boom, who possibly could be the biggest losers.
The Market is Completely Wrong About This Sector October 13, 2017
A few changes happening now could mean that in five, ten years, its position could possibly be nowhere near what it has been all these years...
A Silicon-Valley Insider Shows Us What's Behind the Scenes October 11, 2017
The real gains in stock markets lie in the not-so-obvious bets.
Electric Vehicles Boom: Stocks to Watch Out For October 9, 2017
Are you creating a watch list of stocks for participating in the coming electric vehicles boom?

Equitymaster requests your view! Post a comment on "Nifty Enters Danger Zone: What Next?". Click here!

5 Responses to "Nifty Enters Danger Zone: What Next?"

Lakshmi K

Oct 10, 2017

Nice article based on historical facts, the correction seems to be imminent, good opportunity to enter stocks which you might have missed earlier because of higher valuation.

Like 

Dharmesh Hirpara

Oct 9, 2017

There are one more factors than needs to be further analysed. Can you pls carry out sensitivity analysis 1- Excl Pharma cos and 2 - Excl banking companies.

PE mentioned as above shd be actually around 30 times.

Also the reason for non falling is due to the fact that this time demonetisation helped to pump in the equity thru MFs.

Can you pls review and update

Like 

Prabhu Dayal Sahu

Oct 8, 2017

Thanks for alerting for the imminent crash.To the question when no one has the answer.It is only prudent to be prepared for it while taking advantage of any upmoves that occure in a select few sectores.I hope we would receive adequate guidance from you.

Like 

Dhananjay Patwardhan

Oct 6, 2017

"Thus a smart contrarian would take a much more nuanced approach in today's markets. Rather than moving out of stocks completely, what would be a much wiser thing to do is to tweak the stock/bond exposure in one's investments to suit the odds the current stock market presents."

I am fully in line with this. After reading this I took the following action
I had 35 shares of Bajaj Finserve bought at 3752/-6 months before.Today's CMP was 5305 at 3.13 p.m
I sold 30 out of above at 5305/- at 3.16 p.m. today. I selected this scrip because there was a surplus of Rs.1553/- each .I kept 5 nos. in stock with me. I reduced my equity investment and increased my bank balance to take opportunity to enter at lower level when market falls heavily.

Is this action in keeping with what you have stated in the letter?

Can I follow the same logic where there are negative returns?

Pl. comment on this line of action.


Like 

P RAMADEVI

Oct 6, 2017

Nice to read your 'contrarian' write up. I sincerely wish and hope that this time it will work to the customary tradition. Thank you.

Like (1)
  
Equitymaster requests your view! Post a comment on "Nifty Enters Danger Zone: What Next?". Click here!