Where is NIFTY heading
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- 1. Why long term investors should not enter NIFTY Stocks now?
2. Some Basics We all know Stock Price (P) is a multiplicative function of Fundamentals of company (represented by earning per share E) Liquidity chasing that stock (represented by L) P L * E Volatility in P is primarily attributed to L (liquidity) as E (earning) takes time to improve or deteriorate P/E ratio is a good indicator to measure the Chase 3. Whos the Chaser? There are primarily 2 sets of people who are part of the Chase (or L) 1. FII Also known as Smart investors. They pretty much move the market with their sheer size of investments. They are all over the news channels with their research analysts, news columns, as investment Gurus etc. creating sentiments of fear OR euphoria. 2. Normal Investors Also known as Retail investors. People like you and me, investing directly through our trading accounts or indirectly via Mutual Funds, ULIPs, PFs, SIPs, Insurance companies etc. We are the audience of the news, research analysts and other media sources. 4. Whos buying from Whom? FIIs buy when Retail Investors Sell. (and vice versa) When does Retail Investor Sell ? Retail investor sells when there is panic, recession, markets are falling apart and most importantly when people on news channel including research analysts and Big Investment Gurus recommend that This is the end or Markets may fall another 25-30% by year end or Stay away from market or Cash is King. This is when the Smart guys are buying When does Retail Investor Buy ? Retail investor buys when there is euphoria (India Shining or 2004 election results or MODIs magic wand), all the guys on TV channels are giving new levels for Sensex, markets are breaking all time highs and all the analysts and Gurus are saying Markets to be up another 20% in next few months. This is when Smart guys are selling (or dumping) 5. Why does that happen? Retail Investors are sentimental investors They base their views by gauging the sentiment of the market by watching news, reading reports etc. They get carried away by the euphoric picture being painted by almost all the people in the media (or panic picture as the case may be) They are shown a greedy picture of future returns Smart Investor (FIIs) are technical investors They have access to all the systems, algorithms and high frequency trading tools. Also, they are the ones who are directly/indirectly creating and feeding news to Retail Investors. They buy when there are no Chasers (no liquidity) in the market - at low P/E ratios. They keep dumping bad news in the market so that Retail Investors stay away. They exit when P/E ratios hit high threshold levels. 6. How to stop being Sentimental? Simplest Approach Follow the Smart Guy and not the news/reporters/analysts Buy at low P/E and Exit at high P/E Hmmm. So whats a low or a high P/E? Nifty trades in a PE range of 10.5 to 26.5. 95% of the times Nifty trades in the PE range of 12.0 to 24.0 Heres how Nifty PE has been for last 14 years (from Jan2000 to Oct2014) 7. Nifty PE The walk since Jan2000 There are five zones in this chart 1.) Euphoric zone PE of 24.5 to 28.5 Market never stays here. SMART guys never BUY here 2.) Built up zone PE of 21.5 to 24.5 Market never stays here too. SMART guys PUMP the stories here. They dont buy here either. In last 14 years, Nifty touched 21-22 range 20 times in uptrend and fell 16 times. Remaining 4 times it fell within next 3-6 months 3.) Home Zone PE of 16.5 to 21.5 No mans land 4.) Fear Zone PE of 13.5 to 16.5 This is the zone where Smart Guys start linking the market and start Buying. Retail investor keeps selling as there is lot of pessimism 5.) Panic Zone PE of 10.5 to 13.5 Market never stays here too. ONLY SMART guys are Buyers here as Retail guy in PANIC mode Nifty PE on 31st Oct 14 21.58 Source: NSE 8. Good time for long term investor ? Nifty PE on 31st Oct14 was 21.58 In last 14 years, NIFTY has spent 86% of its time in a PE range of less than 21.58 16 of the 20 times NIFTY has corrected from these levels significantly Remaining 4 times, NIFTY could stay there only for 3-6 months and reversed to mean of 18.5 PE SMART guys are selling across the GLOBE. Institutions are selling more than buying and as usual Retail Investors are net buyers. QE program which was fuelling the rally across all the markets (and FIIs) has been stopped and that should further reduce Institutional Buying. No. of days spent in PE range by NIFTY in last 14 years 86% Markets can surely go up from here, but is the return worth the risk??? Smart Guy would say Hell NO!!! 9. Disclaimer: The views in this report are entirely personal and you should do your own research before basing any decision on the facts presented in this report. Otherwise also, you should do your own research before investing. Smart Guy is doing that! Author : Piyush Dwivedi Email: email@example.com