Indian Equity market at life time highs but valuations are concerning!

Below is the English transcript of article published in “The Economic Times” section of Navbharat Times by Ashish Kyal, CMT

Indian Equity markets are trading at life time highs. In previous week Nifty touched life time highs of 9673 levels and Sensex touched the higher levels of 31,332. Sensex formed an important low at 25753 on 26thDecember 2016. Since then we have seen a rise of nearly 21% in just 5 months of time.   

Sector performance: The major contributor to the rally from the beginning of 2017 has been Banking, Energy and Automobile stocks. One should use any correction in these sectors as excellent buying opportunity from long term perspective. On the other side defensive sector like Pharma has been a major laggard. Stocks within this sector have continued to trade in Bear trend and buying should be done only cautiously unless the overall long term trend reverses on positive side. Midcap and Smallcap indices also rallied sharply during the same period and many of the stocks within this high beta sectors have entered into bubble territory. It is therefore important to have a cautious approach while investing in Midcap and Smallcap stocks. One should follow strict stoploss in case there is sharp reversal as the valuations are very high.

Sensex Valuations: Price to Earnings ratio (P/E) is one of the simplest parameter that helps to understand if the market is fairly valued or not. We can plot the chart of this ratio to see the danger zone in the past and accordingly understand if current valuations are justified. Sensex Price to Earnings ratio (P/E ratio) is currently at 23 levels and Nifty PE ratio is nearing 25 levels. In the past we have seen that important tops are formed whenever markets came near this zone. Major top was formed in 2010 when Nifty PE ratio crossed 25 levels. Also, Midcap and Smallcap PE ratios are extremely high which was never seen before. This indicates that the current market is in the alert zone and stock specific approach should be adopted.

Technical Perspective: Current trend for Sensex is positive but prices are approaching near the resistance levels which is now at 31800. A simple method that an investor can use is to see the 20 period weekly Moving average. In the entire trend of past few months Sensex has managed to stay above this Moving average. Support as per this average is now at 29300 levels. So medium term investors can hold their positions as long as Sensex protects 29300 levels on downside.

Outlook on Currency – USDINR: Indian Rupee appreciated sharply against US Dollar since start of 2017. The currency pair moved from the level of 69 seen in November 2016 to the levels of 64. This will help import related businesses and also ease pressure on import bills of the country. We can expect this currency pair to now move in a range of 63.80 and 65.40 over next few weeks.

Week ahead: Sensex can show some consolidation in this week as prices are near important levels. Investors should buy stocks that are fundamentally strong and avoid Midcap and Smallcap stocks that are overvalued. For Sensex, prices can move within the range of 31500 – 30800 levels in coming week. Fresh investments should be done with strict stoploss levels to avoid being stuck near the top!