Note : This is not a recommendation and I am not a registered analyst,
these are just my observations and an assessment of the positives and negatives
from a longer term point of view.
Nifty Weekly
Still sticking to a broader theme
of a consolidation with a positive bias as mentioned in the weekly for 28th
August. On a longer term time-frame a lot of data still suggests to keep a
positive stance on Nifty. However,
the elevated PE ratio is troublesome but maybe we might consolidate for some
time (weeks/months) before a trend sets in.
Observations (charts below):
In the previous weekly,
concerning the elevated PE ratios I mentioned that since we just saw a 20% cut
in the Index so a probability of seeing another deep cut in quick time seems
low at the moment. “Possible” – Yes but “Probability” well that’s a different
story. Let us not just base the entire argument
on the PE ratio alone since it has 2 components P & E. Let see how the
P & E have compared over a long period of time. In Chart 1 below, the red line is the (Nifty indexed – Earnings Indexed)/
(Earnings indexed) what this does is seeing how much the Nifty has gained
compared to earnings growth. All figures are rebased to 100 beginning in year 1999.
The Red line is above the danger zone of 100% from where it has reverted in the
past i.e. Nifty has grown by 2X its earnings but the conundrum is that the
Earnings represented by the green line is just flat and sloping downward a bit
as of now. So keep a lookout for any improvement in earnings as that will then
affect the red line and in turn the PE ratio.
On the weekly charts, (Chart 2) the broader Nifty 500 broke
out to new all-time highs before the Nifty 50 so it is important to monitor the
Nifty500 index for a breakout failure as that could mean a potential reversal
from here. So far Nifty500, Bank-Nifty and the Nifty 50 are holding above major
support areas.
Chart 3 The Nifty to Bond ratio is above its 40 week moving average
and we have a positive crossover as the 10 week moving average is above the 40
week MA. Thus, from a longer term perspective equities are in favour over
bonds.
Chart 4 this one has started showing some warning signs - the
average and median distance of the
sectoral indices compared to their highest
52 weekly closing. Both the readings took a hard knock this week and the
reading are at -4.8% and -4.2%. I have not tested this but on a glance if the
readings stay below 8/10% for longer it has led to corrections in the benchmark
index.
Chart 5 On intermarket strength we now have Metals and Auto in the
lead, Realty has slipped to third. The defensive sector indices such as FMCG,
Pharma and IT are at the bottom ranks so RS ratios sorted by they being above
40 week moving averages suggests that there is no flight to defensives yet.
Since Metals, Auto and Realty have been the leading indices on a relative basis,
keep an eye on these indices for any breakdowns – If they break past supports
then would be a good time to evaluate and take some risk off the table.
Chart 6 As for the broader trend, all indices except IT are above
their 40 week moving averages. Still supportive of the bullish stance.
Chart 1 :
Chart 2 :
Chart 3 :
Chart 4 :
Chart 5 :
Chart 6 :
