5 Signals show SENSEX is heading back to price correction.

“The Indian equity market is flying high without its wings”

This is what said by Morgan Stanley. And Yeah! it’s true, at least with our domestic market and the situation we are facing right now.

It is highly overvalued and whenever, in future, the bubble will burst, many retail investors may lose.

In this blog-post, you’ll came to get the solution of every question that have wandered your mind related to Current Sensex Peak. This post is divided into 3 sections :-

  • 5 signals that shows SENSEX is heading back to price correction.
  • Top 4 reasons behind rally of market
  • What should be our behavior in such a situation?

The market is at its high and many stocks had trailed higher than what their value should be. This created a situation of a bubble in the market and soon it will burst.

Most likely, market is going to correct itself by the end of this year (Dec) and it will erode the capital from the market. Notably, there are 5 signals shows that market is heading back to its price correction.

Read them all and accordingly take actions ASAP.

5 signals that shows SENSEX is heading back to price correction.

#1) Targeted PE

As per Morgan Stanley, based on the aggregate PE multiples, the real value of Sensex is targeted at 26,000 by December end, which implies a 6 percent correction in the market from its current level.

This PE was calculated on the basis of India’s actual growth and estimated future growth. As compare to current actual growth of our economy, folks are highly bullish towards the market.

No, I’m not intent to say that Sensex is not valued more than 28k. Yeah! Our economy is growing well and still there are many stocks available in the market which can be the best fit for a healthy portfolio.

there are It will keep increasing more in coming years but the growth of Sensex in last couple months is a point of worry. It should have grown slowly parallel to the growth of overall Indian economy but it’s running faster.

#2) Price to Book Ratio Expansion

The Price to Book Ratio has increased while Return On Equity (ROE) has not, which means more inflated prices.

There are many ratios to judge any stock or index but here we took these 2 ratios.

Why? I mean, How these 2 ratios related to inflated prices?

PBR is calculated by Current Market Price (CMP) divided by Book Value and ROE is calculated by dividing the EPS by Book Value.

So the value of BV remain same in both equations and CMP is growing like nothing in the world but the earning is sustainable.

I simple words, the price is hiking at a high growth rate as compared to growth in Net Profit. That’s what made the PBR expanding at a high rate than ROE.

And that leads to the inflated price.

Phew! Nerdy equations. Still confused? Meet you in the comment section.

#3) Mid-cap growing at an alarming rate.

The Midcap stocks PE premiums are at a decade high, which suggests booking profits could come in anytime. Dividend yields are below average.

From the image below, I’m going to conclude 2 things:

  • Nifty Mid Cap Current Market Price is much higher than its 30, 50, 150 and 200 days moving average. It shows a bullish trend since last 200 days.
  • And Its Year To Date (YTD) % is also high at 10% as compared to other 2 caps (small and large cap i.e. 7%)

So as I said, profit booking could come at any time. People will start liquidating their money out of the market and that will increase the sell-off, increasing the supply, decreasing the demand – finally, a high downturn in prices.

#4) No high dividend Yield.

The Indian market has not offered very high dividend yields, which again signal limited upside for the market.

Pardon! here again, comes the mathematics equation.

Dividend Yield is calculated by dividing Dividends by CMP.

So denominator (CMP) is increasing at an alarming rate and numerator (dividends) at a slow rate which turns to low dividend yield stocks. Again high prices with dividend point of view.

I was just scrolling over some well-known blue-chip stocks and was shock to see that there was only finger counted stocks with more than 2% Dividend Yield. With the recent market rally, effective yields have fallen noticeably.

See it yourself.

#5) Nifty at its 52 weeks high

Nifty stands at a 52 week high, which is above levels seen in ever in past. It is mainly due to the tide of money entered in our emerging market at a rapid acceleration of the economy.

Morgan Stanley had conducted an excellent report on current state Indian market. Below is an extract explaining the crux:

“The most important chart – the one-year forward PE of Nifty 50 – is well above the average. Is this an alarming sign? Yes. If liquidity dries out, the Indian market could go into a tailspin.

India’s long-term growth potential remains intact, yet it is difficult to predict when the tide in emerging markets will recede. If that happens, Indian equities may not have legs to stand on irrespective of the long-term growth prospects with multiples as high as they are now.

There was no buy signal, which means the upside remains limited and there is potential for further downside”

So once the tide fades away, all the now excited investors can be seen naked.

So this is what shows that profit booking can occur at any time, now let us understand the reason behind the rally in Indian Market. What made the market go high?

Top 4 reasons behind rally

Earlier Morgan Stanley, HSBC, Citi and Ambit have either upgraded Indian targets or raised index targets citing better earnings, economic growth revival and expectation of a good monsoon.

In the end of June, Deutsche Bank had released a report, cutting its target for the Sensex to 27,000 points from 29,000 points earlier citing heightened global uncertainty due to Britain’s decision to exit the European Union.

Here’s 4 reason behind this rally in the market.

#1) Good Monsoon:

Excellent monsoon predictions and current positive monsoon data supported bullish market sentiments. There are 92 percent chances of India receiving ‘normal’ and above rainfall this season with the good amount of rain expected in Central India. However, it had also affected some areas with floods.

Also, agro-related stocks like Kaveri Seed etc had given a decent return to investors this season. These companies are also estimating to give good returns in coming years.

#2) High chances of approval of GST Bill

Execution of GST Bill will boost the economy to a great extent. Chances are, that the bill will approve in this monsoon session and if not, then the sentiments will be passed out to winter sessions.

Notably, GST bill has following benefits which will boost our economy at high extent:

  • It will simplify the tax process.
  • It will curb black money and corruption.
  • It will improve tax governance.
  • It will unify India as a single and united marketplace.
  • It will bring in a sea change in transportation of goods like the number of days will come down, the cost of carry and octroi duty will get reduced. We can expect 5 to 7 percentage gain.
  • It will ease the process of paperwork.
  • It will create an efficiency in trade.
  • It will ease the process of logistics and will create a faster delivery environment.
  • It will simply the study material of taxation in CA (heck, I was frustrated with all the chapters of indirect taxes in CA).

#3) Huge support from Foreign Portfolio Investment (FPI)

With the advent of Modi government, many sectors had been liberalized with high foreign investment. FDI norms had also loosened which attract many great players from all over the world.

Overseas investors have infused more than $2 billion into the Indian capital markets so far this month on rising hopes of passage of the GST Bill.

According to the data, net investment of foreign portfolio investors (FPI) in the stock market stood at Rs 8,086 crore and Rs 6,917 crore in the debt market in the month of July, taking the total inflow to Rs 15,003 crore ($2.2 billion).

This fueled high amount of funds in equity market which in turn increases the people investment in the equity market. Anytime pulling out of funds can be a point of great worry.

#4) Global liquidity

After losing a high rate of Global growth due to BREXIT, China Market fall and Japan fall – Policymakers from the Group of 20 countries agreed over the weekend to work together to support global growth.

Many nations relaxed the interest rate which made the high global fund availability. And India as an emerging country benefited the most from these global changes.

Mainly, the US and Indian stock markets have been on the higher side for the last decade. However, there exists a high correlation between the time when the market hits the bottom and when the market is at the top.

This all leads to global liquidity, increasing the market bullish trend…… but still, there’s fear of a hike in federal rate in coming announcement.

What should be our behavior?

Here’s the single piece of advice I would like to share with fellow investors is to reduce their investment in the high-risk sectors such as PSUs, corporate banks, and metals.

On BREXIT day, Tata Steel was affected the worst due to its business allegations in the UK. Tata steel lost its value by around 50 reaching and Sensex was down by 1000 points.

I consider investing in Tata Steel at 300 (dropped from 350). And then in a week, it grew up to 330 and then in another week it reached its highest at 370.

My bad luck! I booked profit at 330. It’s a fact – it’s more panicking to see stock growing high after you sell than the stock going down after you buy.

….but I was astonished by the market sentiments – Why in the world Tata steel climbed to 370?

It has a 52 week low and high of 200 and 378 respectively.

So a company with 200x price valuation is valued double to its price in just one year. Even there’s no drastic change in its financials but the valuation is doubled in just one year.

Did the profit double?

Did the Book Value double?

Did the revenue double?


That shows that the stock is governed by Mr. Market and that is why I prefer and suggest you to stay away from steel, IT, pharma and PSUs sectors. They are highly valued by markets and break-out will soon conquer the market. However still, there are some It stocks that are available at low rates.

That’s what I think should be our behavior. And what you think should be our behavior? Add your discussion below. I respond to every comment.

  • Debasis

    What is your recommendation for INFY (NSE) and PINCON (NSE)?

  • Sushanth

    hmm. Next four months are going to be interesting. Currently 7th Pay Commission is being payed by government in August Salaries in one-go. So, probably Central Government employees are going to be spending it in the upcoming festive season. US Elections are worrying a bit for the IT Companies and Pharma. But, should we worry about pharma companies as they are just budding. On the otherhand, IT companies have matured and they have huge business in U.S. US Elections usually sets some policies which affect IT companies most

  • Yeah! Infosys was dropped by 10% a few days back due to low-profit volumes. Since then it’s trailing flat. I can’t say anything for this stock. However, I think pincon would de great in coming 3-4 years of time.

  • Gunvant Patil

    What is your view on REC? should we book profit in it ? as you said stay away from PSU sector ?

  • Sreenivas

    What do you think about Ashok Leyland and Equitas Holdings in long term perspective (min 2-3 years) ?

  • Niranjan

    Market is mostly growing with some inflation month to month(even day to day). So, isn’t it obvious or normal that CMP will most likely to be above ‘x’ days moving average.(where x is any number of days since past). If CMP goes below that average then that is the concern. Is my understanding correct?

  • Gunvant Patil

    What’s your opinion on REC ? you said stay away from PSUs but REC looks extremely cheap and fundamentally good ?

    • Yeah! REC and even PFC looks cheap but they lack growth. Look over their sales and profit. And these type of business advances money to dull sectors so there is high chances of not getting their money back. That is why market had deflated them at such a low price.

      • Gunvant Patil

        Thats great point. Do you have any holding in REC/PFC? I remember reading your blog on REC earlier few months back.

        • I sold them both at great profit margins. They are now touching the sky.

  • Exactly Niranjan but if look at the current situation of the market then the case is different. Inflation, economy etc are growing at a medium pace but the prices are driving high at a very high pace which creates a situation of the inflated price.

    • Niranjan

      Thanks Sowmay for confirmation.. And can you suggest how many days moving average is best to analyse?

      • It depends. Short term traders see 10 or 30 days. Medium see 50 and long term trader see 200. However, there is no use of SMA in fundamental analysis.

        • Niranjan

          Thanks Sowmay!

  • Due to some past experience, I stopped giving personal stock advice. If has any query for information purpose, I would be happy to assist.

    • Sreenivas

      No issues dude. I am happy that you are providing a lot of helpful information through your site which I hardly find anywhere else. Thanks a ton.

  • No personal stock suggestions. I can’t predict the prices in the short run. It might possible that the particular stock touches the high and other stock in the sector deflated. Everything is uncertain in the short term. Therefore, always be lumbi race ka ghoda.