Markets are Overvalued,Correction Expected

After fall of about 800 points few days back , bulls have returned to markets and markets have gone up very fast and Sensex , nifty are making new highs. The Sensex has reached the level of 29400 and nifty has crossed the level of 8900.

Of course, there are lot of supporting reasons for this optimism and there is buying euphoria in the market.

Some of the key reasons for this exuberance are as below

• RBI has finally cut policy rate by 25 basis points ahead of policy review on 3 Feb 2015. Market was long awaiting this news , hence bulls have taken the charges . This iis a welcome news for the corporate world.
• ECB ( European Central Bank ) has declared stimulus of 1 trillion Euros to take out the European economy out of recession.
• Crude prices have come down below 50 $ per barrel , at 4 year low level . As our country still imports about 75 % of crude oil requirement , the drop in crude oil prices is big help to our economy.
• Inflation is seemingly under control leading to lower interest rates expected going forward

Investors are also hopeful of earnings upgrade of the companies . The cumulative effect of all this is leading to market being pushed up to higher an higher levels .

However is a reason to be cautious . As per BSE data the market is now trading at 20 times PE ratio is very high. Also the third quarter results ( Oct to Dec 2014 ) of the companies do not support such optimism and high valuations if you look at the results of large caps like TCS , Reliance Industries.

If you go by history of last 20 years of trading ( in which there was trading for 4950 days ) the markets have trading above 20 times PE for about 1200 days . Hence investors should be cautious and need not make fresh purchases. It may happen the market may go up further , but is better to be safe than sorry. Markets continue to give opportunities for investment.

Similarly if you look at some of the valuations of large cap companies in SENSEX and NIFTY , you will observe that they have reached stratospheric valuations. The examples of the same are given below.

Here ordinary investors can make of buying cheap especially penny stocks , as large cap and SENSEX & NIFTY, stocks have already moved up and when markets corrects investors get stuck up in poor quality stocks . This has happed many times.

Looking at all the above , it can be concluded that markets have now really become expensive . It is possible that operators may stretch it further , however a deep correction is imminent . This is also important from the point of view long term healthy bull market. Hence investors can wait and look for the opportunities to buy.

Koustubha M Kelkar