In my past blog
I had written about how to play the volatility in the markets. I had clearly
mentioned that, the stocks are subject to market fluctuations in terms of
prices and Investors should be interested in the possibilities of profiting
from these pendulum swings. In that blog I stressed on how it is impossible to
time the market and hence one should focus on pricing the market rather than
timing it. However there are certain factors that some time indicates towards
few signals that may help us in avoiding some mistakes.
When we talk
about the timing the markets it means buying low and selling high. However
timing the markets is impossible and it only happens in stories (Usually told
by few people who try to lure the gullible retail investor). However there are
certain factors which indicate towards the fact that markets are peaking out
and hence one can get cautious while investing at those levels.
There are
certain characters indicating that markets are heating up. The following are
certain broad parameters.
·
Historically High Levels
·
High Price Earnings Ratios
·
Low Dividend Yields as compared
to bond yields
·
Much Speculation on Margin
·
Many Poor Quality IPOs tapping
the Primary Markets
Let’s try to get
some idea on this
Historically High Levels
By historically high Levels I mean, when
markets are breaking new all-time high levels almost every day. The Same way it
had happened in 2008, when the markets were scaling new highs and making
historical highs almost every alternate day. While the earnings were not increasing markets
were scaling new highs, only resulting into expansion of Price Earnings and not
the earning per share.
This leads to
the second factor. High Price Earnings Ratios
High Price Earnings Ratios
Just to provide
an example for the above statement, in 2008 the markets were scaling new highs
but the earnings of India Inc remained stagnant clearly resulting in to high
P/E ratio. When market first times touched the 21000 level on 9th
January 2008, the Sensex was trading at 28.57x. Similarly on 5th November 2010 when
the markets again touched 21000 mark, The P/E Stood at 24.15x. This clearly indicated towards one factor
that, when markets are peaking one should keep the track of P/ E levels.
Low Dividend Yield
Dividend is one income which is not taxable
and hence many investors look for dividend yielding stock. However when the
markets heat-up, the dividend yield ((Dividend per Share/Current Market
Price)*100) tend to be lower. Naturally when the prices of scrips are up the
dividend yield will surely decline. And when dividend is lower than the bond
yields, it is clear sign that markets are trading at higher levels.
Much Speculation on Margin
Usually trading volumes
in the markets spurt up when the markets are on high. The volumes are high and
investors (as they call themselves) trade high even on margin money. I have
seen many people investing in markets by even by borrowing. So whenever we see
high margin trading happening in the markets, it is time to get cautious. Usually the derivatives markets witness such
trading with higher volumes. But one should understand that, Derivative markets
are hedging tools and not for speculation.
Poor Quality IPOs
Usually the
promoters who want to tap the primary markets try to take advantage of bull
markets. So that they get better prices for stake they are selling in the markets.
Hence whenever the markets are peaking, we get flood of IPOs. Just to quote “The IPO are floated in
favorable time, but time favorable for sellers and not the buyers”. The poor
quality IPOs usually hit the primary market floor when the markets are at peak
and try to get better valuation. Further gone are days when investors used to
get amazing returns from IPOs. While analyzing the IPOs, I have come across
funny kind of IPO objectives. While one
Company wanted to Pay-off debts, one wanted to invest in subsidiaries. So
whenever we get flood of poor quality IPOs, it is time to get cautious.
So these are some indications which provide
certain indications to the investors. If we get cautious in such scenarios,
many mistakes on investment front could be avoided.
Equity market can offer traders with high returns. Traders having good risk bearing capabilities can invest here. Equity tips are suggested by service providers like epic research as well.
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