Whither Nifty ?

        This has been the subject of my search for the past 12 years and I think I am beginning to see light at the end of the proverbial tunnel. Let me share with you what I have learnt so far.

               Some know that the Nifty made a high of 6357.10 on 08/01/2008, and we all know that it crashed thereafter to a low of 2539.45 on 06/03/2009, a crash of 60% lasting about a year and two months.

             We also know that most of us who were invested at that point of time, were badly caught out and suffered tremendous losses. I was one of the few lucky ones to book profits just three days before the crash. I say lucky, because I was watching Udayan Mukherjee’s show on CNBC TV18, and was hearing Shankar Sharma being extremely bearish, on the show. I was pretty new to investing then and knew next to nothing about the market. So without waiting, I booked profits on almost all my profitable positions, the very next day. The market crashed after three days.

             The rest of my holdings suffered very badly, but over the next 10 years, I was able to get out of all of them save two, with profits. One has stopped being traded and one still remains badly beaten down and in all likelihood stop being traded too.

             So that has been a tremendous learning experience for me and I became more and more determined to get to the bottom of this.

              Cut to 2019, the Nifty has made a new high of 12103.05 on 03/06/19. So are we facing a similar situation to 2008? My humble opinion is, in the short term no, but in the medium term, definitely yes.

              Let us begin with the easier to understand metrics first. One of the first of many important things that struck my mind, after reading Economic Times, more than 10 years back, was that, whenever the PE Ratio of the Nifty has crossed 22, it has crashed and more often than not, substantially. So I began researching the matter. This is what I found.

            On 08/01/08 the Nifty made a high of 6357.10. The PE Ratio was 27.69. Thereafter, the Nifty crashed by 60%.

On 05/11/10 the Nifty almost regained all lost ground and reached 6338.50. The PE Ratio was 25.59. Thereafter, the Nifty crashed by 31.35%.

The Nifty continued its upward journey and reached a new high on 04/03/15 at 9119.20. The PE Ratio was 24.06. The market crashed thereafter by 23.40%.

The Nifty made a new lifetime high on 03/06/19 at 12103.05. The PE Ratio was 29.90. The market again crashed by 12.11%.

So the question now is, where do we go from here? Are we looking at another 60% crash or are we going to go up further?

           Again, my humble opinion is we are likely to reach new lifetime highs, but thereafter, a mammoth 60% crash will be inevitable.

           Let us examine the next level of metrics, the Fibonacci Ratio. This ratio gives us the minimum expected next level. Leaving the basics explanation for another time, let me simply start by taking the Fibonacci Projection of the period between 08/01/08(Nifty 6357.10) and 06/03/09(Nifty 2539.45).

                    Fibonacci Projection         Actual             Date                 Variation

Wave 1 (1.0)         6349.34                   6338.50       05/11/10              (-) 0.17%

Wave 3 (1.618)     8719.15                   9119.20       04/03/15              (+) 4.59%

Wave 5 (2.618)    12546.06                                      yet to happen

 ( I have left out W2 and W4 from the conversation as they were corrections in the ongoing bull market)

        Wave 5 is the last stage of a bull market, which has not yet reached its minimum projection of 12546, which is why I still expect the Nifty to go up. However, that does not mean that it will stop there. Euphoria may take it to levels of even 13000 or higher. But I have to warn you that euphoria is also the death of a bull market. Therefore, after Wave 5, the corrective phase or bear market will bring the Nifty down by a minimum of 61.8%, that is to levels of 6366(if the high was 12546) and 6536(if the high was 13000).

          Remember that the PE Ratio would be above 30 at that time. The same applies to the Sensex or any portfolio of stocks, say Ulips or even Mutual Funds, but it does not apply to individual stocks. If you want to find the PE Ratio for the Nifty/Sensex for the day, simply google it.

         So what should you do? If you are a long term investor and can hold on for 3 years (from top to bottom to regaining top), you don’t have to do a thing, as the market will regain from whichever level it falls and to whichever level it falls to. Simply hold your nerve and continue SIPS or even continue to add at lower levels, albeit in fundamentally good stocks.

           If, however, your Ulips are maturing within the next one to one and a half years, or your goals fall within that period, switch to Bonds under ulips (don’t be cute and wait for PE Ratio to cross 30, do it immediately), as this will give a further fillip of between 15-20% during the downturn.

          If you are invested in stocks and mutual funds and your goals fall within this period, then as they start becoming profitable, start booking profits gradually. Do not make any fresh additions. The time to make fresh additions will come and you will get stocks at awesome valuations.

        After booking profits, where should the money be shifted to?

 For the risk averse, liquid funds. For conservative people, govt./PSU Bonds(AAA) and Gold ETFs, but NOT Corporate Bonds/deposits, whatever be their rating.