Nifty has touched the unprecedented levels and the valuations have reached sky rocket. The PE ratio of index has crossed back above 28 levels!
For us charts convey lot of information. In the past we have seen how markets behave when PE ratio crossed above 28 mark. It was in the year 2000 and later 2008. The euphoria has been on a rise but deliverable volumes are low. Many are still stuck in Midcap and Smallcap stocks and are waiting for them to recover.
We use advanced technical tools like Elliott wave, Neo wave, Time cycles and much more. Look at the below chart published in the latest monthly research report – The Financial Waves monthly update
Nifty Gann projection levels:
Nifty Gann projection
Nifty PE ratio:
Nifty PE ratio
Below is the part of research picked up from “The Financial waves monthly update”
Euphoria – Mania returns to equity markets –
Nifty had a strong rise in the month of July and prices moved from the lows of 10604 to 11366 thereby making new life time highs. During this period we can also see Sensex and Bank Nifty also touching new highs. The reason why we are addressing this move as euphoria or a mania is by looking at the trailing 12 months Price to Earnings ratio.
Price to Earnings ratio at historic levels – If you look at Figure 5 we are showing over past two decades the levels of PE which result into catastrophic reversals. The correction which ensued when PE ratio was so much stretched was a rush to catch back again with the mean value. To maintain the mean value we need to see deviation in the opposite direction. So everytime prices crossed above 2 standard deviation of mean PE value we can see it going towards negative 2 standard deviation over subsequent months or years. This way the average PE had been maintained around the zone of 18 – 19.
Also, everytime such historic valuations are reached there will be enough logical reasoning to explain why it is justified. Even during IT boom of 2000 there was justification that the economy is now going through a historic change which was never before witnessed and so re-rating of PE is inevitable. But what was inevitable was the sharp reversal and deep correction post that. This time as well majority of the fundamentalist who are already invested in the markets are now justifying why the current levels of PE value is fair. Trust me this has been ongoing for centuries and is no different. If you can simply open the charts of global markets with long enough history and search the news when the valuations were highly expensive you will find similar reasoning because there is no other way to explain the mania.
If you have been following the monthly research over past months we have identified such mania in Bitcoin and everyone saw how quickly the entire optimism turned into catastrophe. We are not trying to catch a top here but the risk which is now increasing with each passing day is simply not worth the fresh investments and we have history of data available to back this up.
Gann projection level:As shown in figure 4 Nifty has now broken above the level of ……. which was acting as stiff resistance earlier. This level will now act as a very important support on downside. The next projection level as per Gann is at 11503. So for any reversal confirmation we need to see decisive break below …….. levels and unless that happen it is best to avoid catching a top in this euphoria.
Neo wave plausible scenarios: (refer the monthly research report)
The above shows the important levels that one has keep a watch and why the valuations are at extreme levels. These tools are not for short term timing but it is important to pay heed when they reach the extreme zone!
So, what is next for Nifty, sectors that will outperform, commodity index and much more?
Get access to “The Financial Waves monthly update” and see yourself all the major indices at a glance with most objective reasoning in this euphoric scenario. Also for limited time you can now subscribe to “The Financial Waves short term update” and get monthly update along with it. Subscribe NOW here
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