When you look to news headlines about Sensex or Nifty touching lifetime high and all stocks touching their all time high, you immediate start planning to invest your money too in stock market. Although, it’s a dream of every one to earn huge profit but one needs to understand the financial instrument well in advance before putting hard-earned money.
Generally, it happens that when Sensex or Nifty is correcting, every one becomes “genius” and start predicting that it will correct more and when it rises at all time, one start investing money. Isn’t it the opposite way of investing.
I’ve seen many investors starting investing when Sensex high figures become headlines of news and when the correction comes steeply in stock market, they exit their money with huge loss.
It’s difficult to predict well in advance the day-to-day movement of Sensex or Nifty or other stocks. But there are way which broadly clarifies the path of Sensex in near future.
One such way is technical analysis way. Lots of indicators, putting them in a software, get back-date data of stocks like high, open, close, low price of a day, week, month and analyze with past actions. Many indicators gives good results like Doda-Donchian indicator, Bollinger Bands, MACD, Ichimoku etc. But this analyzing requires lots of experience and patience. You may refer to website like DodaCharts.com for that.
Another way is fundamental analysis. It covers reading balance sheet, profit and loss statements, future earnings, P/E ratio, competitive companies track, economy buzz, international price of metals, oils etc. etc. etc. Even after all this, it has been seen that company which exists only on papers gives 100%-300% returns in just few weeks while bluechip company gives negative returns. So, this is not our cup of tea for the time being.
And now, we’re going to discuss one simple but powerful way to predict crash of stock market well in advance. Imagine, you look at some data in excel file, and in seconds you come to some conclusion whether it’s time to enter or exit in stock market.
That way is checking P/E ratio of Nifty.
We’ll discuss all the steps in details with example now.
Visit the official website of NSE at http://www.nseindia.com/products/content/equities/indices/historical_pepb.htm
You’ll get screen like this:
Select CNX Nifty from “Select Index”.
Choose a back date, say a month before from “Select a time period” and current date in “To” field.
Tick on P/E check box and click on “Get Data” Button.
You’ll data on the same screen, something like this:
If the data is big and not able to fit on screen, you’ll get link of “Download file in csv format” at the bottom of report.
Click on that link and it will save CSV file on your computer. Just open that file in Excel spreadsheet program.
It shows data in 2 columns. Date and P/E figures.
Can you make something from this data? Not yet? Don’t worry. I’ll show one example.
I’ve downloaded the data from 1-Jan-1999 to 9-June-2014 via the same website and made chart also. You may download the file from link CNX NIFTYpe01-01-1999-TO-09-06-2014 also.
The chart is shown below:
If you analyze this chart, you’ll notice that Nifty P/E ratio has never gone above 29. Max.was 28.47 on 11-Feb-2000 and also, it has never fallen to single digit. The min. was 10.68 on 27-Oct-2008.
Now, notice that whenever Nifty P/E ratio goes above 22-23 levels, it prepares for massive correction and when it reaches around 12-13 P/E ratio, it starts preparing for strong pull back.
In other and simple words, Nifty P/E ration around 23 levels means, one can safely exit from stock market and sit on cash or preferable invest in bank FD or Gold. And when Nifty P/E ratio comes around 12-13, start investing again in stock market.
But is it a 100% successful formula?
No, it is not. It’s just a analysis of last 14 years of data and Nifty movement. It might happen that you exit at P/E ratio of 23 and Nifty moves another 200 points OR you invest at lower levels, and Nifty corrects more. That does not matter. Few points here and there is not a matter of concern. Overall, if you follow the above technique, the chances are that you’ll invest or exit at very reasonable levels.
“History repeats itself” phrases originate from such instances. You take your own call on it.