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Are The Markets Overbought?

Monday, April 21, 2014

The markets are at historical highs as FIIs pump in billions of dollars, the election euphoria continues...But will this strongly bullish undertone last or will there be a pre-result correction? Mayura Shanbaug spoke to a few market experts. Here are their views...

Are the markets overbought at the current levels ?
The markets have rallied by over 14% since February this year and are in overbought zone. However, there may be some more upside from here before we enter a phase of correction or consolidation. Typically such tearaway Bull-runs can remain in overbought zone for many weeks before any meaningful correction.
Vikram Dhawan, Director, Equentis Capital

The Sensex is currently in the mid 22000 range and Nifty is upwards of 6500. The Sensex has given a return of 4.8% (3 months), 9.10% (6 months) and a whopping 18.80%(1 year). So one can safely surmise that the smart money has not only been  invested, but is already reaping good returns. At current levels the dice is loaded against the market with a major event risk that has to be factored in. That said, traders and investor have shown a cautious approach and the rally has not run wild. This can be borne out from that fact that the markets have witnessed healthy corrections from time to time and post each such correction, the market has continued its upward move. Even if we look fundamentally, the markets have not been discounted very richly over the earnings of the next couple of years. Hence I would not say that the markets are over priced, but it can be said that they may be temporarily over bought.
Alok C. Churiwala, MD, Churiwala Securities

Indian markets have rallied by 10% in the last two months breaking the range of the past six years and are currently trading at all time high levels both on the Nifty and the Sensex. This has also been aided by inflows of more than USD4b by FIIs in 4QFY14 which was driven by expectations of a stable government post elections. Thus, while index levels are at life-time high, market valuations are still below historical averages at 14.7x. So, though the markets seemingly are poised at their life time highs, it still offers pockets of sectors and stocks that are available at reasonable valuations based on their earnings trajectory and historical valuations.
Mayuresh Joshi, VP, Angel Broking

Don’t think it’s a simple yes or no question as after a 15% upside in the markets, it’s natural that the markets look a bit overbought, technically speaking. On the other hand, after a 6 year correction, it’s not very surprising that the markets have moved in a rather large quantum. But an overbought situation could exist for months on end while the markets continue to scale new heights. So overbought, yes slightly, but trend reversal, no.
Hemen Kapadia. CEO, Chart Pundit

Will we see a major correction in the short term?
The worrying part of the current Bull Run is that it is building in an extremely positive Election outcome. Whilst, opinion polls may suggest absolute majority for one single party or coalition, however at the end of the day it is extremely tough to predict precise outcome of any elections. Therefore a hung parliament may seriously disappoint the markets and we may witness a very sharp correction.
Vikram Dhawan

Most of the current euphoria in the markets is based on the ‘Modi Wave’ and its resultant impact on the economy and markets. The elections will throw out the results in less than a months time, but even in the event that the best case scenario also come true, the markets will see a healthy bout of selling, as the traders would like to take home profits. Alternately If the election result is anything short of a healthy majority, then there would be severe selling by both, the long purchasers (who will scurry to book whatever little profit that may be left) and the short sellers who will then try to capitalise on the below expectation election results. This would initiate a  major correction in the short term.
Alok C. Churiwala

We expect a revival in the economy on anticipation of the investment cycle getting boosted post elections owing to greater policy certainty. An improvement in global growth and hence in external demand environment, GDP growth having bottomed out and hence expectation to it trending upwards, and deceleration in food inflation are also some of the key positive impulses for the markets going forward. So, though volatility might exist  on the markets, our take based on the aforesaid parameters point to the fact that the markets are on the cusp of making new highs over the next few quarters.
Mayuresh Joshi

Its probably the beginning of a long term rally which could last for multiple years, so corrections from time to time cannot be ruled out, while if a correction is in context of the size of the preceding upmove then logic says that a big upmove would be followed by a big correction. Since there is an epochal event in the making (the upcoming elections), an unfavorable result could upset the applecart and what could follow would be a crash and not a correction. In the event of an expected result, profit taking cannot be ruled out, but a big correction seems tad bit difficult. Don’t agree that this is a short term rally.
Hemen Kapadia

Your advice to the common investor?
The dominance of Institutional Investors both overseas and domestic continues to increase in the Indian markets. Flow of Institutional money is now fundamental to the Indian markets. The retail investor may have to increase their investment horizon and stick to high quality stocks to hedge against market volatility and bad timing.
Vikram Dhawan

The current state of participation or rather lack of participation by the Retail Investors is a cause of concern for not only the entire broking community, but also the Regulators and Senior Officials of Ministry of Finance.That said, at the current moment the investors should not get swayed by the current momentum but draw out a strategy based on a long term approach. I think the common investor should pass the one time opportunity of seeing an election rally and concentrate on building a quality portfolio, consolidating it from time to time based on sound advice from professionals. The expectations of returns should be pegged at a realistic levels keeping ones risk appetite in mind.
Alok C. Churiwala

Retail investors have not witnessed return on their investments over the past 5-6 years and some of their investments made in small and mid cap stocks are still stuck for want of price. However, retail investors should adopt a stock specific approach and go for companies with stable managements, strong corporate governance, robust balance sheets. And stay invested over the next two years. The Indian markets might go through a different earnings trajectory cycle with growth returning back, inflation normalizing and opportunities created in a variety of sectors with the right reforms and Government push.
Mayuresh Joshi
Looking at the way the mid-caps and small caps (even quality stocks) have performed over the last 7 years it’s not very surprising that the retail segment is virtually out of the market. Its better late then never and retail needs to participate in the markets as they could be missing out on a huge opportunity and if they have burnt their fingers the last time around, an SIP based mutual fund approach spread over a minimum of 5 years should give them decent if not good returns. As stock picking could be an issue, its better left to the professionals (mutual funds) while a mix of blue chip and midcap funds should even things out over the longer term.
Hemen Kapadia

Sectors safe to invest in the current markets?
Irrespective of the election results sectors such as IT, Pharma, Autos, Telecom, and FMCG may continue their long-term trajectory and are relatively immune to political developments.
Vikram Dhawan

The market has been favouring IT, Pharma, FMCG and Banking but the best companies in these sectors are not cheap. Whereas it does require some expertise to identify the potential gems hidden in the midcap scape in these sectors. Investors could consider some rather beaten down and out of favour sectors like Realty and Metals.
Alok C. Churiwala

We are positive on several cyclical sectors now. Banks, Auto, Auto ancillaries, Capital goods, Infra and other cyclical sectors are all likely to benefit substantially from an economic upturn, policy reforms and declining inflation. Moreover, these sectors are still trading at highly beaten down valuations making it an ideal time to invest in them.
Mayuresh Joshi

The last few years have belonged to FMCG, IT & Pharma and though they could continue to do well, Banks, Capital Goods, Metals & Oil & Gas is what I like.
Hemen Kapadia

What are the short term and long term levels do you see in the markets.
Nifty remains well supported at 6500-6600 levels in the short-term before the election results. Assuming we have an extremely positive election outcome then the Nifty may rally towards 7300 by the year end.
Vikram Dhawan

The Sensex will be in the range of 20500-24500 (which means a 8-10% range in either direction) for the next 30-45 days. Over the long term (a horizon of 3-5 years) the Sensex should be in the range of 19000 – 32000.
Alok C. Churiwala

We foresee levels of 6850 on the Nifty till the date of announcement of the election results. We expect Sensex EPS to grow strongly by 16.9% to Rs. 1,530 in FY2015 and by 15.4% to Rs. 1,766 in FY2016, implying a CAGR of 16.2% over FY2014-16E. We attribute a 15.5x multiple to our Sensex EPS based on FY2016E earnings and arrive at a target of 27,300 for the Sensex over the next one year, implying an upside of about 22% from the present levels.
Mayuresh Joshi

We are at all time highs so the levels are a bit dicey to look at but strong support comes in at 6350, 5926 and 5500 while resistance comes in at 6820, 7400. I see the Nifty at 10600 and the Sensex at 36000 in the next 4-5 years.
Hemen Kapadia

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