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Market Melt-Up Takes Nifty to Reaching Distance of New High

Market investors will rejoice today as the Nifty went up 2.5% to reach 6140, in reaching distance of the all time high of 6312.


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Note that both the 50 and 200 day moving averages are pointing upwards again, and in very short time we have climbed 12% to reach these numbers again. Where do we go from here?

The Bullish View

We are not at new highs, despite the large upmove we have had so far. Japan is, and the US is. A new high is what describes euphoria.

The P/E ratio isn’t insane. We are still at 18 levels (on standalone, trailing 12 month earnings), and the consolidated numbers will give us even higher earnings. This is pretty much where the Index has been for the last 10 years or so. Remember, at the last two times we were at these highs, the index P/E was way above 22.

EPS Growth is at 15%, which is close to the highest EPS growth numbers since 2011. If EPS growth is returning, paying a higher P/E for our market makes sense – and the P/E isn’t unnaturally high.


Liquidity remains strong worldwide. With the US printing $85 billion a month and Japan doing $75 billion a month, we have a lot of money being created outside. If even a sprinkling of that money comes to India, our markets will go up. Our market volumes are still not so huge that we are speaking of euphoria – just about $2bn a day in the whole stock market.

Where are the IPOs? At nearly all market tops, there are these massive IPOs that come along. Promoters are continuing to avoid listing, and they will come at some point – that’s when it might be time to be wary, not now.

The general sentiment continues to be bearish. Do you see overjoyed looks on faces as the Nifty charges towards a high? Not really. The average retail investor is absent, and most market commentators don’t like this rally. It has climbed a wall of worry, despite all the bad data out there.

Inflation’s easing, and interest rates are falling. Falling interest rates are supposed to do a lot – make loans cheaper, stimulate growth etc. They may do nothing of the sort, but the “feeling” is that they will, and that’s what seems to matter.

The Bearish View

India is slowing down. In the last two market highs in 2008 and 2010, India’s economy was growing at 8%+. Today, the growth story has been curtailed with the last quarter seeing just 4.5% growth, the lowest in nearly a decade.

We face high retail inflation. With CPI inflation at 9.39%, the “real” interest rates are deeply negative, and it’s unlikely people will want to invest when much of their discretionary spends are getting eaten up by the service components of inflation (housing, salaries, travel etc).

Car sales are down, home sale transactions are down. As discretionary spends reduce, you find money moving towards the essentials. This does not augur well for many industries, and remember that nearly 2/3rd of our GDP is private consumption.

The Current Account Deficit continues to be high, as Gold purchases have increased so much they have accounted for a record trade deficit in April. Services exports could make up for it, but the western world’s growth remains weak, and they are slowly erecting barriers to prevent the taking away of jobs by Indian outsourcers. While we finance the deficit there through foreign inflows, any sort of liquidity crunch in the west, or even a tapering out, will cut our financial tap and hit us both at the layer of USD-INR and inflation.

The rally isn’t secular. Most mid and small caps remain beaten down while some market leaders are at highs. Reliance isn’t making new highs. L&T, despite a strong move in the last few days, is way below where it used to be. BHEL, too. The banks are going through the roof, as are paint and tyre manufacturers. (This could be taken to mean there is a larger upside to come, of course)

My View

The trend is up. Shut up about all the bearish noise and ride the tide. This rally has so much power behind it that it can’t even face a 2% down turn – and neither can markets in the west. It will end badly, as all bull rallies do, but if it made a 50% gain from here, and then fell 20%, you will still be higher than where you are today. If there is a reason this market is going higher, it is because it is going higher.

I continue to be long in my portfolio in certain stocks that have been making all time highs – Berger Paints, Supreme Industries, Finolex Industries and so on – entries abound in other stocks that have just about started to move. I may not like financial stocks, but it is tough to ignore that HDFC and HDFC Bank have made new all-time highs. The strength in strong stocks is likely to drive the market up; you have to watch the setup attract the regular junta who will then invest.

There is no reason to be underweight stocks. However, even in an up market, there could be scope for shorting certain stocks or sectors at intermediate points, but I will do so only with a strict stop loss.

Where you should be careful is: Gold. It’s moving back down and might start to crack if momentum goes against it. The rupee isn’t showing signs of great strength either, and neither are most commodities (Iron ore has been going deeply negative). While FMCG has given great gains, it may just be time to say goodbye, as inflation eats into their profits as well. Auto stocks are likely to be a better buy next year.

Overall, I would keep a trader’s mindset for this rally; stay on it, because it will make you money, and get off when the music looks like it wants to stop. It doesn’t matter if you miss the last 10%.

  • Sunil Arora says:

    Very good article. Dividend yield is 1.35. Usually near the peak it goes down to as less as 1 or below. So there is hope for this rally ( or the next one ) so it makes sense to be long.
    By the way, what software do you use for charts. They come out looking sexy 🙂

  • IsItPossible says:

    >>> “but if it made a 50% gain from here, and then fell 20%, you will still be higher than where you are today. ”
    Thats a BIG “but”, Isn’t it!!!
    Besides, the bigger question is when shall one take profits and get out vs stay in for possible move up?
    Can this market continue to move higher especially when we have following roadblocks that we are aware off:
    1. Elections next year
    2. Retail investor is NOT part of this rally
    3. GDP is continuously revised lower every quarter
    4. New Scandal pretty much every week
    5. Lot of global instability
    In short, one needs to be ready with a plan as to when shall we hit the exit door before turning those gains into losses…

  • Sunil Arora says:

    I must adopt you guys as my gurus cos for the life of me, I cant figure this out in Excel. Anyways cheers to continued upmove in the market

  • Guruprasad V says:

    Benefit of doubt gives room for rally. Most of the people are suspicious of this rally. Opinion and position are two different things. Pundits in Television channels cast their opinions whereas if you look their books they might not be that much aggressive like their posturing in channels. What they say doesn’t matter , what they do matter and most of the people are still skeptical and are non participatory in nature and this makes markets to rally further. People in India are talking about politics and other related non sense which are no way going to affect the markets. If some one speaks about over bought zone they simply have to look into past bull markets that continues to be overbought for years. Only too much participation would put an end to this rally. If there are only few skeptics then this rally could possibly come to end. If there are no problems, then this rally could probably come to end. In this age of abundant liquidity and constant interference of central banks, I believe rally have many more legs than our imagination. If it turns we simply have to accept and reverse the positions. That’s it. It is only through sitting (riding the rally) one could make money in the markets. Time is ripe to make money by simply sitting in the position. I prefer stocks that make new highs and 52 week highs.

  • Sandeep says:

    did you get a chance to update your worksheet of consolidated EPS for Nifty/Sensex for FY 13 (as against stand alone).