Nifty Budget and PE Ratio: What's in for you!!!

NSE:NIFTY   Nifty 50 Index
Previous Close 11027

Good Morning to all of you...

Its Budget day today
What will it be like...
Will we see Corporate tax relaxation
Will the Common Man get some relief in Income Tax
Will we see changes in Long term Capital Gain tax...
What will happen to Fiscal Deficit etc...etc

So many questions... So many possibilities... All will be answered today by the Finance Minister.

However from a Technical Analysis point of view Price reflects and prices in every thing.

So we look back at the chart and concentrate on the numbers more and see if can get some answers

On charts we observe

- 2 Parallel Channels of same size ( Green Channel being original. Red Channel being replica)

- Nifty is at levels that coincides with top of Channel Replica

- Nifty has formed major tops and bottoms around Budget day in the last 3 years

Chart wise that says a lot... Caution is in the air...

For those looking for some more deeper analysis and playing around with numbers... Well carry on reading...

Below is the Link which will take you to an excel sheet where Nifty Budget day reactions since the year 2004
have been captured along with performance of Nifty till next Budget.

Also we try to analyse if Price to Earning Ratio has any say in predicting the movement....

If you see out of 16 times Nifty has given
- a positive reaction on 8 occasions &
- negative reaction 8 times

So it's 50:50. In terms of probability Nothing much to choose...

But in terms of Magnitude

- Nifty has at best given 2.63% reaction on a positive note
- However it has fallen by 3% or more on 3 occasions (worst being -6.21% in July 2009)

So although Nifty has reacted positively and negatively equal number of times, Net Change on Budget day since 2004 turns out to be -8.87%

Day traders / Short term traders, hope it helps to plan your trade accordingly...!!!

Now that we have covered short term view lets look at the bigger picture i.e how Nifty has done Budget to Budget. Lets try and also analyse whether PE ratio has any thing to say

Nifty PE Ratio or Price to Earning Ratio is a Fundamental tool which reflects overall Valuation of the Market

Below is the link of this Fundamental Information being converted into a Chart for analysis.

Nifty PE > 22 considered to be on the expensive side

Nifty PE = 18 Fair or Reasonable valuation

Nifty PE < 15 considered to be at attractive valuation

In the excel sheet one may notice that whenever Nifty PE has been below 21 on Budget day, it has given a positive return till next Budget on all but 1 occasion

In 3 out of 4 occasions, when Nifty PE has been above 21 on Budget day, Nifty has given negative return of 20% or more till next Budget

And on one occasion i.e in the last one year Nifty has given a Positive return of 26% despite Nifty PE being at 23.27 on 01-Feb-2017

Today as we stand, Nifty PE is at 27.5. Again this time it could be different ... Markets can scale even further higher but Numbers & stats suggest otherwise...

A possibility of 20% fall or more till next Budget is having a 75% Probability of coming true
So Stay grounded... have realistic expectations... Do not over leverage... & give more importance to Risk Management !!

Wish all the best & Hope it helps you all a long way in planning your investments...!!!

Do share with your friends and colleagues if you find the analysis insightful, interesting & helpful

Take care & safe investing...!!!

Comment: Nifty down more than 500 points from the top on Budget day in 3 trading sessions itself...

No one can time the market but when time comes one can surely make the most of it...!!!

Consider to book profits in short positions

Take care, happy & safe trading...!!!


Great analysis sir! Thank you, for sharing!
Good one
very good innovative work u did.keep it up buddy cheers:
Quiet Insightful, will look in detail :-)
Only one doubt....Last Year Nifty PE was 23.27 still Nifty gave return of 26% ......Can you clarify why so ??
kacharts flynn317
@flynn317, 2 things first of all pe range has been shifted range is 16 - lower side 32 - higher

and another thing is alone pe ratio can be misleading especially when we r in bottom of earning cycle .
so alone on pe parameter if someone is judging market is expensive then be ready to see more surprises in near term though small corrections are always welcome( dnt mislead correction in trend reversal)
flynn317 kacharts
@kacharts, Thanks

To put in simple words… demand has been more than supply

Why demand has been more…

Well, we observe that

- after Demonetization, Domestic funds has been finding its way to Equity Markets more than it was before

- Introduction of RERA and higher Real Estate prices limiting investments in Real Estate sector

- other investment opportunities not looking that lucrative

- The decision by Govt to recapitalize PSU Banks have kept the investor confidence abreast despite higher valuations

- Also if we analyse there is a drastic change in component of Nifty 50

- In 2007 Financial Services contributed 11.46%

- Today Out of 13 sectors, Financial Services alone has a Lion’s share at 36.35%

It is a possibility that since Banks are measured more on Price to Book Value that people are looking to ignore PE Ratio for time being...

Here's a look on stats of Nifty PE, PB and Dividend yield of previous 2 tops of 2008 and 2010 and how it is currently

- Price to Book Value now is 3.76 closer to 2010 peak but nowhere near 2008 high of over 6.

- Similarly Dividend yield of 1.02 currently is closer to 2010 lows of 1.01 but still quite higher that the lows of 0.82 in 2008.

So there is scope for some euphoric movements.

At the end do remember that these stats are not to be taken as golden rules but more as a guidance for Risk Management...

More so these stats are more helpful in taking decisions for the longer term i.e if your time horizon is 2-3 years or more.

Hope it helps...

Take care & SAFE INVESTING...!!!

flynn317 indiamarketoutlook
@indiamarketoutlook, Thanks,Will see in detail......
Awesome!!!!!!!!Thanks for sharing.