Is the market peaking out?

In tune with our anticipations, the markets have finally been able to break out of its long trading range and crossed the 20,000 level in a few trading sessions. We are definitely in a boom market phase at the moment. The market momentum is largely being driven by foreign investors. There is muted growth in Europe and US. In search for higher earnings, FII’s money is flowing to markets like India. Domestic investors are not yet excited and that is a cause for concern. There seems to be some sort of nervousness, which is understandable after last year’s bull market rally. The retail segment is in a dilemma, whether the markets have peaked out or nearing the saturation level. But, our analysis based on the parameters- Price to Earnings ratio, Price to Book Value and Yield Gap shows that there is still some time to reach that levels.

We see that everytime the P/BV ratio has crossed 6.5, we see a decline in the markets. Currently the ratio stands at around 3.7. There’s a long way till the alarm bells start ringing. Similarly, historically it has been observed that whenever Equity yield has crossed the G-Sec yield, it makes sense to invest in equities. On the other hand whenever G-Sec yield has reached higher than equity by 4% or more it has been a good opportunity to sell out of equities. This indicator is very accurate in predicting the peak of the bull market. We, see the yield gap at 3.7 that is, hovering around the levels of 4%. Moreover, Sensex is trading at the levels of 17-18x one year forward earnings. Usually the peak is at a forward PE of more than 20 for the Index. When we see the earnings growth expected over the next two years, it seems still not overvalued, clearly marking that there is a further scope for upside.

Thus, we recommend, keeping in mind the upward potential that investors should remain invested.