How to Invest When Nifty PE Ratio Has Gone Beyond 30? - Part I


In the year 1999, when the American index S&P 500 was significantly in uptrend at that time Mr. Warren Buffet was questioned, “What’s wrong Warren?” That means in the year 1999 when the American share market was consistently in uptrend, Mr. Buffet’s company Berkshire Hathaway still wasn’t able to perform well in the market. At that time Mr. Buffet’s ability was being questioned by all. What happened next?


Talking about the Indian share market; presently the market has gone beyond 30 PE meaning that the share market has become very expensive. Fundamentally where the market is expensive, technically till the market is above the level of 10,562 it is giving out a signal of an uptrend for the short-term. So now what should be the investing or trading strategy? If you wish to know about it, let’s find out in our today’s blog.


If you want to be successful in the share market, then you first need to carry-out a 4 – step analysis. The first step is to identify the market valuation. According to Nifty PE, the market valuation has become expensive as it has gone beyond the mark of 30. So here the catch is that while trading in an expensive market you should always keep your capital minimum. The second step is to check the market direction. If we check the last week’s market momentum we find it is negative. The last week as the American market indicated an uptrend, hence the beginning of this week may indicate an uptrend. Also, as per the short-term chart, till the market is above the mark of 10,562 the market is in uptrend.


In the coming week if the market given a signal of uptrend, then you can trade in the shares showing uptrend by keeping a stoploss in place. According to the third step, where to carry-out bullish trades in? You can trade in those shares that have given a signal of moving out of the box. Now, what is this Box Technique? Nicolas Darvas who was a famous dancer who made excellent returns from the share market within the shortest possible time and so how did he do it? If you wish to know more about it kindly look into the earlier blogs. We have covered it all there. So the shares which are trying to move out of the box, you can trade there by having a stoploss in place as well. The fourth step is to identify the share those have moved out of the box and trade there by placing a stoploss.


So which are those shares that have come out of the box? Before that we’d like to give a disclaimer that the shares that we’ll be talking about next are just for educational purpose. So if we look at the market from the year 2015, we’ll find that the Pharma Index had underperformed. So currently, CNX Pharma has given a signal of moving out of the box i.e. it has given a signal of uptrend. Pharma Index here represents the set if Pharma companies.


In the Pharma sector, Ajanta Pharma after moving in a limited range has now given a signal of moving out of the box.  So till the time Ajanta Pharma is above the level of Rs. 1, 329; it is possible that in the near future there may be a scope for this company to grow well. So in the upcoming period if the market indicates an uptrend and we continue to get a signal of uptrend in the Ajanta Pharma then you can trade here while having a stoploss in place. Also, remember we can go wrong here any time and this is just for educational purpose. Otherwise you would blame us. So what we learn here is that when a share gives a signal of uptrend, we should not only analyze just that share but we should also analyze the sector to which that share belongs to as well because shares always move on a bunch.


So even though technically the market is in uptrend but fundamentally the market is still very expensive. The market valuation i.e. the Nifty has moved beyond the mark of 30. Most of the people have asked that you have always said that the Nifty PE moves on the range of 10 & 30 but now it has gone beyond the mark of 30, so now what to do? The market has gone beyond 30 that means the market has become even more expensive.


Also, till date we have only talked about the Nifty PE, now let us talk about the Sensex PE. The National Stock Exchange i.e. Nifty represents the top 50 companies of the country. Similarly, the Bombay Stock Exchange represents the top 30 companies of the country. So Sensex too has its own PE ratio. In the year 1992 if we check, the Sensex PE has reached the mark of even 40. That means it earning yield was just 2.5% and in that time if compared it to the Bank interest, it seemed that the market has become too much expensive.


So how did the market reach such expensive valuation? The reason was Harshad Mehta. There’s a very famous dialogue in the English movie ‘The Godfather’ and that goes like this, “Behind every successful fortune, there goes a crime.” So behind that expensive valuation was the Harshad Mehta Scam. When this scam was exposed, the market crashed severely. Hence, it is important to check the market valuation along with the price.


When the market valuation is expensive, invest less and if there is an uptrend in the market then we’ll earn good returns on what we had invested. Had we invested more and later if the market had gone in uptrend then we would’ve earned more profit there but that’s a different thing. But the smart thing is to invest less when the market is expensive because if the market goes in downtrend later, we’ll have to face a huge loss there.


Weʹll see the next part of this blog in our next blog.


Until then...


Happy Trading, Happy Investing!!!



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