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9100, Bull Trap or Breakout

March 20,2017 Stallion Asset Blog

From last 2 weeks, every morning my mailbox is filled with the same mail, is 9000-9100 the intermediate top or is it a big breakout.

Today i am going to give you all the data you need to analyse if its the start of a new trend or a intermediate top.

1) PE Ratio/ P/B Ratio/ Dividend yield. (Ratio’s which everyone Follows)

2) Market Cap to GDP (Ratio which Warren Buffett Uses)

3) EPS Growth Rate

4) Dow Theory Breakout

5) Currency viz Emerging Markets

6) Flow of Funds

7) VIX

8) IPO Data

Factor 1 = PE Ratio/ P/B Ratio/ Dividend yield (Traditional Valuation Parameter) 

In 2002-2003 All the above parameters were giving clear indicators for a Buy & in 2007-2008 all the parameters were far stretched which led to a Bear Market Rally. In Current Scenario 2016-2017 PE looks on the higher side while P/BV is well below the previous high and no clear evidence is seen.

Factor 2 = Market Cap to GDP

This is Warren buffett’s favorite parameter to understand if stock market is overheated. Market Cap to GDP Stands at 80% which is somewhere in between overheated and Cheap. The Parameter Doesn’t give us any clarity.

Factor 3 = EPS Growth Rate – Sensex EPS Growth for the 8 years has been well below the nominal GDP growth. Corporate earnings growth are normally mean reverting and its expected the earnings growth will catch up with the nominal GDP growth of about 13%. Sensex EPS is pretty much same since 2014, but the consensus is strong revival for next 3-4 years.

Factor 4 – Dow Theory Breakout – Nifty successfully closed above 9100 which was its previous intermediate top suggesting that nifty is breaking out. 9000 zone was testing 6 months back in August, and has now made a CUP & HANDLE pattern suggesting at target of about 11200. The Caveat here is that Sensex hasnt crossed its previous high yet, but a break above 30,000 for Sensex for more than 2 trading sessions would confirm a pattern breakout.

Factor 5 – Currency viz Emerging Markets – INR has been the most stable currency in last 4 years among emerging markets. Stable currency attracts foreign capital. Last week the USD broke important support levels of 66 and suggest a major breakdown against the INR. If USD:INR stays below 66, you can expect the rally to continue and probably gain more momentum as well.

Factor 6 -Flow of Funds – Bull Markets are made of liquidity, the domestic investors were net sellers from 2011 to 2015, and have turned net buyers in 2015 and 2016. We believe there is a 5 year cycle which investors go through and till 2020 we expect flows to be very strong. FII’s are a little difficult to predict, and we don’t have the analytical capability to understand FII flows.

Factor 7 – VIX – This indicator gives me goosebumps, because market are expecting very low volatility based on prices of options. The positions are pretty much short volatility i.e. markets won’t correct much. The crowd is normally right except at the turning points. This Indicator is showing that the markets are very complacent which is a dangerous sign.


Factor 8 – IPO Data – We divide IPO’s in 3 phases
1) Bear Market – Good Companies, Cheap Valuation

2) Bull Market – Good Companies, High Valuations

3) Euphoria – Bad Companies, High Valuation.

The IPO data tells us that we are in phase two of the bull market where good companies are coming at high valuations. They are normally PE investors who are exiting the company or booking a partial portion of their equity. IPO data tells us that we are atleast 2 years away from Euphoria Top.

Conclusion and Stallion’s View – The Market is definitely overbought on the short term, but downside seems limited to 8500. The Markets are well poised for higher levels in coming months. We are not in the cheap market zone, nor in the expensive market zone, we are somewhere in between these levels. Technically once Sensex closes above 30,000 for more than 2 days, there will be a major breakout which can take the Sensex to 37,000. Overall In short term there can be volatility of 5%, but in next 12 months, 24 months, 36 months expect the markets to deliver 12-18% CAGR returns. Out of the 10 Indicators we have tested, 5 are recommending a Buy, 3 a hold and 2 a SELL. We at Stallion have concentrated our portfolio in the Sector in Play, these companies are growing at 4-5x faster than the real GDP growth, and are reasonably confident that we will beat the market consistently.

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