Bull or Bear...?

On Friday after a long time the Nifty has given a closing above the important level of 4720 and as per Mr. Mukherjee (CNBC) this could very well mean that we are heading towards the magical 5000 levels and are in fact in a multi year bull market.

I was also doing my bits of research to check whether or not this is possible or not. Came across a nice article by one of my colleagues which very well articulates my thoughts on where are the markets heading. Thought of sharing with you people. Here is what it says...

We are in strong uptrend from last 7 days.Strangely, it was more due to the buying of domestic financial institutions. On some of the 7straight up days, the FIIs were net sellers.

The forthcoming PSU divestments - particularly, the Oil India IPO ata large premium - is the probable cause of the domestic institutions propping up the market.If that surmise proves correct, then the Nifty could move higher during the next couple of weeks till the IPO gets over.However there are couple of concerns in my mind regarding Nifty.

Firstly,we are trading at PE of 21+ as per attached chart below.Historically we have corrected from 22 zone except euphoric years like 2000/2007(dot com boom and credit boom) .From the current situation there could be two outcomes -Either market corrects 20-25%which will take valuations back to historical averages or bulls gain full control and valuations enter a bubble zone.However for the latter, bulls need help from India Inc besides the purchasing power(liquidity) .Earnings growth of Indian companies need to pick up fast or else valuations will keep getting dearer pushing markets nearer to bubble zone.There has been rush of fund raising by companies recently mostly in the form of equity .This will lead to equity dilution and further depress EPS.

Secondly Nifty is very near the 61.8% Fibonacci retracement level from January top of 2008 to October low of 2008.The retracement level comes at 4800.Even though nifty has broken the earlier resistance of4725-4730 and has made a new 2009 high on Friday, one needs to be cautious at this juncture.

Thirdly, an observation on the Sensex chart is also a cause of concern. The distance between the 50 day EMA and the 200 day EMA, is close to 2000 points. On prior occasions, such a distance between the medium and long-term moving averages have led to severe corrections or even trend reversals. In the 5 years closing chart of the BSE Sensex index attached below, note the bull market corrections in 2006 and 2007, when the 50 day EMA deviated too far from the 200 day EMA. In 2008 and 2009, the deviations were bigger which led to trend reversals.

Can the pattern repeat ?.It may repeat in next couple of weeks after the Oil India IPO .One needs to avoid new investments now until Nifty and Sensex take a clear direction. Rather than betting on the Nifty or on speculative stocks one should invest in sectors that have strong long term growth potentials. Likes of Media, Pharma, Power Ancillaries and Brokerage sectors I believe are good for long term investments and could provide substantial return.

Will be soon posting some of the reports by our firm on the mentioned sectors.

Till Then Happy Investing