Predict Nifty Trend Based on PE Ratio Chart
By now, You would have heard the Analysts and agencies say that the Market valuations are stretched quite significantly. What they mean to say is – the markets are at an overbought level and it is becoming increasingly difficult to justify the valuations.
Midcaps and Smallcaps are in a different uncharted territory altogether, when it comes to Price Multiples and Valuations. In the bullish run, it gets complex to decipher the irrational exuberance sometimes and what we witnessed in MIDCAPS and SMALLCAPS is nothing short of that very exuberance.
It is all the more painstaking for retail investors to realize when to book profits because before you know anything it is too late. MIDCAPS/SMALLCAPS have shed over 17% within a quick span of time and it the process many retail and small investors would have failed to book profits when they should:
Here is a look at the P/E chart of Nifty 50 that clearly indicates the markets are at overbought levels. Big investors/Big whales just need a reason to sell and make profits i.e. entrapping the retail investors and naive traders. In this case, the budget was just a trigger for the sellers to dominate.
Below chart indicates that PE touched 27.50 on Jan 30th and immediately saw a steep correction. P/E is 26 as of 2nd Feb’18 which is still on the higher side.
P/E chart of Nifty 50 (Nifty Trend)
Thumb Rule for Profit Booking
Unless the markets find support in the form of some positive triggers in the near-term, we may witness more selling in the upcoming sessions.
It may be prudent for investors to watch and buy the stocks at lower valuations later on.
Risk comes from not knowing what you’re doing.” – Warren Buffet
Here are a few tips for the short term:
Invest in fundamentally strong stocks with lucrative valuations.
Trade with a strict stop loss
Go for the defensives
Rejig your Portfolio and it may be time to add IT/Pharma names.
Investors are advised to exercise caution for the near term any negative trigger or geopolitical issue might spark a huge selloff. Invest/Trade prudently.
Don’t get too emotional while investing.
We hope, you now understand what investment decision you should make according to P/E ratios.
It is our endeavor to educate everyone and help them save and make money.
Note – The author is an Independent Research Analyst with over 10 years of experience in equity markets and offers unbiased advice to clients.
You can reach him at [email protected] for queries/consulting or Portfolio Management.