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Charts & Analysis

Macro Charts: Nifty near 6,000

The Nifty reached a relative high today, closing just off the 6,000 mark.

Nifty chart

What I don’t like is the volume – typically we should see rapidly increasing volumes, but that has not happened.

Most of the volume has come from FII purchases, though:

FII net purchases cumulative for 2010

And look at the FII versus DII data for this year:

image

Recently, nearly all the DII Data is negative, while FIIs piled on. A look at valuations – the Nifty P/E ratio today crossed 25 – a sign of overvaluation? The last time the Nifty P/E crossed 25 was 11 Oct 2007, and in three months the P/E reached 28 before the Nifty crashed in Jan 2008. Prior to that, the Nifty crossed 25 P/E in Jan 2000, but a warning – that was based on earnings from annual reports, not quarterlies as the P/E is calculated now. Nevertheless, two things happened similar to 2007 – the Nifty P/E went to 28 before it crashed, and the subsequent crash took four months or so.

But in those days no one was expecting a crash – now, everyone seems to be doing so.

image

Also, EPS growth is now at a miniscule 6% compared to last year. A look at the Nifty normalized P/E and EPS growth:

 Nifty Normalized P/E and EPS growth

Obviously valuations are stretched, but they could get a lot more stretched before they fall. Unlike the last time, I’m paring down my longs – about 40% long right now, with trailing stops. I don’t care if I miss the rest of this rally, but I keep enough in there for it to be a meaningful ride.

I think we should see a new high, but all bets are off right now. Trailing stops, very short holding periods, and staying nimble is the call of the day.

  • Sam says:

    >I've already sold of everything. Just sitting on cash now.. 🙂

  • Anonymous says:

    >Today's FOMC meeting most probably will not talk about quantitative easing. That is bad signal for markets and I expect correction as FIIs are betting on more QEs from FED and in anticipation have taken position in risky assets from Emerging Market Stocks to Gold.

    MK

  • Anonymous says:

    >I take back my earlier comment. FED did not dissapoint. They said they are still worried about inflation going down. Means QE is still alive. Gold immediately jumped to 1290 per ounce.

    So we will still rally in Emerging Markets.

    MK