Thursday, January 14, 2021

Nifty A Mania: See the Fundamentals!

Nifty looking at the fundamental parameters and why we are calling this a Mania

Chasing the Momentum: Current movement that we are witnessing in the Global markets is a classic example of how fast the sentiments can change from extreme pessimism to extreme optimism or in other words from Fear to Greed. The fall of March 2020 and the rise post that has clearly demonstrated this across the asset classes. We can clearly see most of the assets are rising as if there is no tomorrow. Bitcoin is also one of the classic example that moved from sub $10000 to above $40000 in just 4 months of time. Tesla is another asset in itself now that is responsible for making Elon Musk the richest person on the planet with the PE ratio of Tesla standing at 1767 levels. In simply words chase the momentum as long as the music is on and when it stops ensure you are the first one to get out.

Below chart is picked from the latest monthly research report showing key fundamentals for Nifty

Nifty Fundamental Parameters at a Glance

technical analysis , nifty

Following is from the Monthly research report that shows much detailed outlook key levels on Nifty as per Gann Square of 9, Neo wave, Hurst’s Time cycles. Below is a gist from that report.

We are seeing this fundamental parameters in order to define whether the current up move in Indian equity markets is in tune with the most followed fundamental parameters or it is diverging from it. The above chart shows Nifty price to Book Value. This parameter has worked extremely well within the broad range of 4 and 2.5. We can clearly see that the area of 2.5 was oversold and the area above 4 had been overbought since 2008 onwards. The sharp rise for Price to BV near the range of 6.5 in 2008 was associated with the rise in earnings that move the PE ratio to the extreme level of 29 which was the historical elevated levels.

Now if we compare both the Price to Book Value along with Price to Earnings ratio in current market environment we can clearly see that the PE ratio is touching the highs near 40 levels which is way beyond any historical level and the Price to Book Value is also touching the 12 year peak of 4. Adding further to it is the Dividend yield of the index that is approaching the level of 1.

Now many fundamentalist will try to explain these extreme readings on the basis of growth story, consumption or liquidity. Either of this is as good to satiate the current biased view of staying bullish but not the objective way to read the indicators. Many who are trying to justify the future growth in earnings should calculate the Price to Earnings Growth (PEG) and with the most optimistic growth forecast as well the forward looking PE ratio PEG itself is in the bubble territory.

We can clearly see that prices have moved from the extreme pessimistic scenario seen in March 2020 and now to the other side of the coin – EXTREME GREED that has taken over. These parameters does not give an exit signal but only warns about the current context of the market and where we stand as of now. Do not try to justify these readings with the lens of growth as that is only an assumption and it can dissipate with prices faltering. Yes, infact the growth story is believed to be true as long as prices are moving higher but when prices start faltering the same growth story will take a back seat and majority will start talking about derailing economy and the long term impact of Covid-19.

The fundamental charts by plotting simply gives visual understanding to any investor who has an unbiased eye and does not need much explanation. Given this do understand that we are not catching a top here but as mentioned in the beginning part of the research it is time to keep chasing the momentum as long as the music is on but when the tide turns be fast enough to get out!

In a nutshell, the simplest way to trade now is to keep riding the trend using any of the basic trend following methods (as mentioned in the latest monthly research report) but being aware about the fact that we are in maniac mode with respect to every fundamental parameters. Stay bullish as long as the support holds and be ready to reverse the direction as the tide turns. The immediate support over short term is near ……… followed by ……….. levels. On upside, ………

To know the key levels and details outlook on Nifty using most advanced technical analysis methods get access to “The Financial Waves Monthly Update” over here

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