Nifty P/E and Dividend Yield

This week lets look at 2 interesting ratios Price to Earning Ratio and the Dividend Yield of the Nifty. I have plotted the graphs from 1999-2010 taken from the NSE site.

1. Price - Earning Ratio.
This is nothing but the Market Price divided by the Earnings per Share or the Profits made by the company. This helps us identify how expensive the market is.
In the bubble peaks made by the market in 2000 and 2008, it had touched almost 28. In the bottoms made in Jan 04 and Mar 09 it was near 11 and Sept 01 around 12. Whenever the market has tumbled from P/E of 28 or rallied from 10-12 P/E it was a major top or bottom.


The market is currently around a P/E of 22.05. In Feb 01 when market tumbled from a P/E of around current levels it came to a P/E of around 13 again. On subsequent occasions it stopped its fall in a range from 12 to 15.
Now the EPS is Rs 234, after another 2 sets of quarterly results by July, assuming a gain of 6 pc, the eps should around Rs 250.
This gives a Nifty range between 3000 and 3750. This would coincide a retracement of 50 to 76 % of the rise. The figures would look speculative right now but the graph gives a perspective of P/E range.

2. Dividend Yield
Dividend yield is nothing but if we take dividend as a percentage of market price.High dividend yield means the stock price is low and vice-versa. This is inversely proportional to price of Nifty. When nifty is at highs, dividend yield is at lows and vice versa.


In 2000, the yield bottomed at 0.62, in 2008 at 0.88 and currently we are 0.93. Remember in 2000, we were in the dot com boom, hence IT stocks which give low dividend compared to price were at the top. For a dividend yield of 0.88, market would trade at around 5550 or 18500. We are not very far from that.
The yield tops out at 1.7 to 2. The dividend earning now is at 4919.Assuming a earning of Rs 5200 by the time we bottom out, Nifty would come to a range of around 3100

Both the above studies, simply indicate we may be near the top and give a range of the fall to follow.Of course, we could simply discard the 8 year cycle go on to make another peak at Nifty P/E of 28 translating to Nifty 7000 and then crash big time.

Lots to ponder about. Its your money, make informed decisions.

P/E:An update

The Nifty P/E is at 22.89 as of 01st October.

It has exceeded these levels only during the bubble crashes of 2000 and 2008. In 2004, it briefly flirted above this level before falling.

We have 2 scenarios now:
1. It keeps rising to about 28 creating a bubble like scenario. It would break the previous high or thereabouts and the a mega fall.

2. Correct from anywhere here to 5200 zone. Every time it corrects, it comes down to a P/E of 14-16 which would be equivalent to 3200-3600 range.

Right now, the liquidity is gushing with FIIs pumping in 1000 crores daily. I have not seen even in the earlier bull run.

We have the dollar carry trade like the yen carry trade with hedge funds borrowing at low interest rates in the US and leveraging these dollars in India.

These positions will be unwound when the dollar strengthens, (it would take more rupees to buy the same dollars invested) or interest rates rise in the US.

The dollex is showing some signs of rebound on Bernanke comments. Interest rates rising in US will take some more time.

Troubles in China or at home in US could reverse the flows.

Time not to invest aggressively and keep taking profits with trailing stop losses. I would keep a stop loss of 4900 for my investments.

Markets: How high can they go?

The Markets keep rising. All the prophets of doom and gloom are decreasing. The bears have gone into hibernation.Happy times are here again.

Lets check out the fundamentals. Domestically, the things have improved definitely. Forget the IIP numbers which are overcooked by the government anyway. I look at the Auto Sales numbers as a key measure. Maruti is producing at peak capacity. They are now only constrained by Production limitations.
Indian IT companies are again bagging orders. The freeze is beginning to thaw. Domestically, things are beginning to look bright. My sense is that the next downward trigger will not come domestically unless its a Mumbai style Terrorist Attack. This time, India will not be expected to give a muted response.
Globally, things are seemingly looking up. The US and so the world markets are at new 2009 highs. It seems pumping in cash has done the trick. I will keep a watch at China. They are often the leading indicators of things to come. It seems a dichotomy that Chinese Markets are tanking when Global Markets are partying.
How does China become so important?
They hold a large amount of US Treasury bills, they are largest purchasers of US debt and FIIs for BRIC countries look at China for direction.
The US data looks towards a stabilizing of the job markets. The rate of decline has reduced.
The nifty has gone up 6.75 % in September. This has primarily been due to FII inflows of almost 8000 crores. DIIs have put in just 800 crores. The Party will continue till liquidity keeps pouring.
The FII or the so called smart investors often so a herd mentality. When they stampede towards the exit they do not give an opportunity to exit.The Nifty is at a P/E of 22.31. This is historically where it takes a dip to at least 19.

So what should you as an investor do?
If you are already invested and looking to book profits, keep booking at every rise of say 200 nifty points or keep a trailing stop loss of 20 EMA which stands at 4777 as of yesterday.
If you want to invest money look for dips to buy. Again, one could look at dips to 50 EMA to buy which comes to 4601.

Remember, if the crash comes it will be swift and brutal. So, you will know that it is not time to enter.

The markets had come 50 EMA levels last around 18-19th August, nifty 4353 which was a buying opportunity.