The Nifty PE ratio has now touched historical levels at 31.37x levels. This is a huge rise and deviation from the median which has also shifted towards 20x levels from 18x earlier.
The recent rise in the PE ratio has been the steepest seen since the 2009 bottom. The major difference being, 2008 bottom was made when the PE ratio hit the lower 2 standard deviation level of around 11x before the prices started rallying.
It was in 1999 – 2000, 2008, January 2020 when we saw this fundamental parameter reaching towards 2 standard deviations above the median and now it is fast moving towards the 3 standard deviation levels.
You will see all sorts of justifications for the sharp rise in PE readings and many will even claim that there is a range shift in the ratio itself or this is a new economy or anything else which is logical to hear but not necessarily correct.
This is nothing new but every time we see such justifications the market corrects itself eventually to sensible levels.
Word of Caution – do understand this ratio can remain elevated for a few weeks or months before the reversal happens and so it is a dangerous signal but price confirmation is required for reversal which is lacking as of now.
Nifty continue to rise in form of wave b:
The Nifty has continued to witness an up move in the form of ongoing wave 'b' after forming a low near 7,511 levels. The Neo wave suggests that after a sharp fall in the form of a wave, there is a very high likelihood that we will see a triangle pattern formation.
Triangles can be tricky and can suck in a lot of investors or traders exactly at the wrong time. We are seeing wave 'b' formation on the upside which has not reversed even now and prices have managed to cross even above the WALL area of 11,300 levels even though the volumes have failed to pick up.
Rise of Robinhood Traders -
Source: Investopedia
As SeekingAlpha.com states - first, the lockdown and the stay-at-home economy was a wake-up call for many Americans to think about investing in the stock market.
A quick Google search would have had many of them realise that getting started in the stock market is not that difficult in this digital era. Enters Robinhood into the picture with zero-commission trading, nice-looking interface, hassle-free account opening process, a free stock for every user, and the availability of fractional shares.
Robinhood reported a record number of 3 million new accounts in the first quarter of this year as many Americans moved in the stock market for the first time in their lives.
This is no different from what we are witnessing in India as well. The number of new demat and trading accounts rose sharply across Zerodha, Upstox and many other discount brokers post April 2020.
This only showed that newbies entered the markets post the crash and there was nothing much to do due to lockdown.
When the tide turns these novice traders who do not know anything about Risk and Money Management are going to be crushed like never before which will result in a major “mental pandemic”.
In a nutshell, markets continue to stretch like a spring with new entrants looking at it as a money-making machine. When the unwinding happens, it is going to be chaotic and Elliott Wave patterns will warn us as it starts
(The author is Founder of AshishKyalTradingGurukul.com / WavesStrategy.com. He could be reached on Twitter at @kyalashish)
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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