SENSEX 17475
Moves can remain subdued until its 'Oct high of 17493 is taken out. Such a subdued scenario is possible, though bias continues to be positive until low of any previous day gets broken.
The treacherous progress has been despite the net FII inflow of nearly Rs.10000 crs. during its formation … marginal returns form such inflows now appear reducing … the 86% up-move from 8047 (6th March’09) to 14931 (19th May’09) saw FII inflows of only Rs.25000 crs. Since 19th May, the FII inflows have shot up by further Rs.62000 crs, in response to which, market moved only 16% … Further FII inflows will risk the reducing marginal returns, and can come in only for safety, and not for returns.
Below 17500, correction expected. However, a sustained trading above 17500 is a positive scenario. This would calculate to 22000 on Sensex by May’2010. Such a positive scenario would create a bubble-like situation in terms of valuation (PE Ratio). Upsides targets could be 17735 / 18100 / 18450 / 18900. This will be presented once 17500 gets decisively taken out. In such a bullish case, Sensex will go into a longer consolidation, lasting a decade or more, (similar to its consolidation seen during ‘1992 to ‘2003).
I also explained my PE Ratio argument previously. I argued, “At its highest level of 15600 on Sensex, PE Ratio had reached 21+, which is near the maximum figure of 22 seen under ‘normal’ circumstances. Only bubbles can push it higher towards 28. Such bubbles happened during ‘2000 and ‘2008, which were 8-year cycle tops. It takes 8 years to build a bubble. Bubbles have never been seen in two consecutive years.” Currently, the PE ratio is at 23.
Watch if the Sensex remains subdued, or goes in for a decisive surge above 17500 to reject bearish options.
2003 and ‘2009 rallies are similar in terms of the time consumed and gains registered, both gaining about 115% in about 8 months.
On its maturity, the ‘2003 rally got retraced by 60% in 60% time, dropping to 4227 before the next move. If the current rally matures at the current levels, it could also show a 60% retracement (11850) by March’2010.
On its maturity, the ‘2003 rally got retraced by 60% in 60% time, dropping to 4227 before the next move. If the current rally matures at the current levels, it could also show a 60% retracement (11850) by March’2010.
Will the history repeat itself ? Whether this happens or not, we need to be cautious on this front.
Sensex maturing near 17500 would support my argument that market usually corrects after doubling. Ratio of 200% can be seen even for all the first rallies coming out of bear phases :
- After a 24-month bear phase during 1986-88, Sensex doubled from 390 to 798 and went into sideways consolidation for about a year before moving further up.
- After a 13-month bear phase during 1992-93, Sensex doubled from 1980 to 4643 and went into sideways consolidation for about four years before IT bubble happened in 2000.
- After a 39-month bear phase during 2000-03, Sensex doubled from 2904 to 6250 and saw a quick 60% retracement before resuming the bull phase.
Remember, 17500 is about twice the value of Oct’08 low of 7697 or ‘Mar low of 8047.
Zerodha (Trading Account)
RHP
