Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

What Could Possibly Go wrong with Nifty?

1 min read

Historical PE-Ratio of Nifty

Chart Courtesy : Nifty PE Ratio

As of last 9th Oct 2020 closing of Nifty (11914), PE ratio stands at 34.71. By any means, it indicates euphoric markets.

The above charts show the historical PE-Ratio of Nifty. Recently there is a hockey stick growth in the PE ratio of Nifty since the Mar 2020 lockdown. The rate at which the PE ratio is growing rapidly over the last couple of months indicates that  that investors are expecting higher earnings growth in the future and on the other side it also means kind of fundamentally overbought levels from the investing timeframe perspective

At this point of time Financial services contributing 1/3rd of the total weightage in the Nifty 50 index. And next to financial services Oil and Gas and IT sector are the dominant forces actively moving the Nifty 50 near to 12000 levels.

PE ratio tells us how investors value one rupee of per-share-earnings. For example, if the P/E ratio is 34.71, it means investors are willing to pay up to 34.71 times for one rupee of per-share-earnings.

Currently, the PE ratio is way above 3 standard deviation levels which statistically indicates an overheated Euphoric market environment where investor show irrational behavior and chasing the price is the primary motive from the investors and hardly anybody cares about how overvalued a particular stock is and what is the actual value of the stock.

Investors simply Buy the stocks just because it is going up and momentum gears are in top speed.

As per the latest NSEindia Fact sheet for Nifty 50 indicates Reliance and HDFC Bank are the top heavy weights

Returns since the 1st Apr 2020

Post the March 2020 Nationwide lockdown the top 10 Nifty contributors provided fantastic return. Top returns comes from Reliance with more than 100+ returns due to the continuous news flow followed by the IT heavy weights TCS and INFY with 65% and 86.11% returns respectively. And the least returns comes from the FMCG counter Hindustan Unilever and ITC with -0.74% and 6.06% respectively.

India Ranked 4th under the top fundamentally overvalued ratio metrics

So, What do you think? What could possibly go wrong this time? Is it different this time?

Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

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