As we approach October 2024, several key indicators suggest that the long-standing bull market may be nearing its end. The Nifty has surged to new heights, but recent technical and fundamental signals are flashing caution for investors. Let’s dive into these indicators and assess what they mean for the market in the coming months.
Open Interest Signals a Capped Market
One of the primary indicators pointing towards a market cap is the open interest data for the October 2024 monthly expiry. Strong call writing at the 27000CE strike suggests that the market is likely to face resistance in the 27100-27300 range. From an investment perspective, this area acts as a clear cap, indicating limited upside potential for the ongoing rally. With market participants not expecting the index to move much higher, the likelihood of a stalled rally increases significantly.
Nifty 50 PE Ratio Reflects Fundamental Overvaluation
The Nifty 50 PE ratio stands at 24.34, a level historically associated with overvaluation. Elevated PE ratios often indicate that stocks are priced beyond their intrinsic value, and at such levels, markets become vulnerable to corrections. This fundamental overvaluation is a warning sign for investors looking for further upside in the current market. With valuations stretched, the room for sustainable growth appears narrow.
Overheated RSI with Upper Bollinger Band Resistance
On the technical front, the RSI (Relative Strength Index) on the monthly chart is at an overheated level of 83.71, signaling overbought conditions. Additionally, the price is sitting at the upper Bollinger Band on the monthly timeframe. Historically, when both the RSI is overheated and the price is touching the upper Bollinger Band, a mean reversion becomes highly probable.
Any significant price correction could see the index revert to the Bollinger Band’s mid-line, which currently sits around 22,000, marking the expected fair value of Nifty. A pullback to this level would align with broader market trends and bring valuations back to more sustainable levels.
Buffet Indicator: A 20-Year High Signals Caution
The Warren Buffet Indicator, often regarded as one of the best measures of market valuation, has reached a staggering 140% for India as of August 2024. This is the highest it has been in the last 20 years and certainly not a comforting figure from a valuation standpoint. The Buffet Indicator measures the total market capitalization of a country divided by its GDP, and Warren Buffet himself believes that when this ratio falls between 70-80%, it’s a signal that the market is reasonably valued and could provide solid investment opportunities. However, when the ratio approaches 200%, as seen in the U.S. in 1999, the market is considered overheated and at significant risk of correction.
At 140%, India is in a precarious position, with market valuations nearing their historical highs. This ratio suggests that the stock market is fundamentally overvalued, making further upside limited and corrections more probable. Investors should approach with caution as the risk of a pullback increases at these levels.
Moreover, it’s important to note the shifting dynamics within the Indian stock market. Midcaps have increased their contribution to total market capitalization from 12.5% a decade ago to 18.12% today, while small caps have almost doubled their share from 5.5% to nearly 10%. In contrast, the contribution of Nifty 50 companies to the total market capitalization has fallen to an all-time low of 44%, down from their historical range of 55-60%. This shift highlights the growing importance of mid and small-cap companies in driving market growth, but it also raises questions about Indian stock market valuation and sustainability in these segments.
With these numbers, it becomes clear that while the broader market has delivered phenomenal returns over the past decade, particularly in midcaps and small caps, the current valuations are stretched, and investors should tread carefully. The Buffet Indicator’s current level of 140% is a clear signal that the market is no longer in value territory, and future gains may be more modest and accompanied by heightened volatility.
What This Means for Investors
With the RSI overheated, Nifty’s price at the upper Bollinger Band, a fundamental overvaluation via the PE ratio, and the Buffet Indicator pointing to a strongly overvalued stock market, the risk of a correction in the near term is increasing. The market appears to be approaching a point where upward momentum will be limited, and a mean reversion to 22,000 could materialize in the coming months.
Conclusion
The combination of technical, fundamental, and macroeconomic indicators suggests that the bull market that has driven Nifty through 2024 may be entering its final stages. As we move into October, the market faces increasing resistance, and the likelihood of a pullback or correction is high. Investors should brace for potential volatility and reassess their positions, as the long-term returns may not be as robust as they were during the earlier phases of the rally.
