Thursday, July 17, 2008

Nifty May Fall to 3500, Started Looking Attractive

The Nifty opened today and started going up but like most of the days these days, the excitement lasted only about an hour or so before it started slipping down again. It made a low at about 3840 and started some recovery but soon after the European markets opened it started coming down again. The European markets were weak and at one point the FTSE was about a hundred points down but recovery in the late afternoon session (in Europe – by which time India had already closed) took all European markets well in the green (about a percent up) except FTSE which closed 21 points in the red. News on the international front is good today. Dow is trading 200 points up at the moment while the crude is trading below $135 a barrel. The American markets increased after results from Wells Fargo, a huge mortgage underwriter and servicer, which according to Bloomberg, came out with “better than expected” results after their profits declined by 23% and EPS was 53 cents a share against expectations of a 50 cents EPS. This was enough to make Wells Fargo jump 24% in a day. Compare this with Infosys results and the price movements, and we know how negative the sentiment in India is.

Nifty Monthly - Stochastics at All Time Low, RSI near historical supports

Seen above is the monthly chart of Nifty for the last decade. The indicators along with the price chart are the Stochastics oscillator (in green) and the Relative Strength Index (RSI) at the bottom. Never before in the history of the Nifty was the Stochastics down to these levels. Today was the all time low of the Stochastics indicator (5,3,3) in the last 16 years. As far as the RSI is concerned, it is only on one occasion in the last 16 years that it has went down below 40 (in September 2001) otherwise it has always found support at 40. Today the RSI was 44.43 and hopefully, this time too it may reverse from 40 (we assume such a long trend to continue until it is broken). The price chart shows a little more downside because the long term trendline drawn from the 2003 lows shows that there is support near 3500, which is in line with the target that we had calculated in yesterday’s post. Both the RSI and Stochastics show that the bottom may not be very far away.

Fundamentally too, the things are not looking too bad. According to the NSE website, the Nifty today closed with a Price to Earnings Ratio (P/E) of 16.33. At the same rate, assuming the price does fall to 3500, the P/E of the Nifty too would fall to 14.97 at current year earnings. Going forward, assuming that the earnings would grow at only 7% (the same as the GDP growth) per annum, the Nifty would then be available at only 13.99 times FY09E and 13.08 times FY10E. Today, it is available at 15.26 times FY09E and 14.26 times FY10E. Even during the Sep 2001 lows (after the Twin Towers crash) the Nifty was trading at a P/E of between 12 and 13 times earnings. Considering that the economic conditions may be better 6 to 12 months down the line, don’t these P/E levels of 15 to 16 times seem attractive? To me, they do.

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