Investment Shastra

Sensex crosses its MRP of 19,295; investors should consider selling stocks above their MRP.

The last week was full of action for the stock markets. The week opened with Sensex, the benchmark index crossing the 19,000 mark for the first time since the peak of January 2008. More was to follow as the rally has continued for the next few days and led to Sensex crossing Sensex@MRP for the June 2010 quarter which stands at 19295.

Sensex@MRP gives you an indication of whether the Sensex is fairly valued or whether irrationality is driving the markets. It is the intrinsic value of Sensex determined primarily by the earnings of the Sensex companies. So, the logic here is, if Sensex goes above Sensex@MRP, it signals that the market is moving from being rational to being irrational. It means you have to become cautious because if it continues to rise further, this rise is not justified by increase in earnings; it would thus be time to start selling off.

And this is what has happened over the last week. Sensex has crossed the Sensex@MRP for the June quarter which stands at 19295. (You can read the detailed report here). The rise seems to be fuelled by funds pumped in by the FII. Just to give you an idea till the 13th of September (8 days of trading), net FII inflow in the equity market aggregated to Rs. 4,600 Cr. This when the average monthly net FII inflow during a boom period usually ranges around Rs. 4,000 Cr. Also, from June till September 13th, net FII inflow has been Rs. 26,216 Cr, which is higher than the inflow (Rs. 24,132 Cr.) for the entire year of 2009. (Source: www.sebi.gov.in, Business Line)

It could also be because of expectations of higher earnings for the September quarter buoyed by good global and domestic markets and a better than expected rainfall. Whatever the reason be, one thing is for sure, that the market has crossed its fair value and has moved into the region of irrationality. If it moves further up, you can be rest assured that it is the irrationality that is driving the markets and not the fundamentals.

We have backtested and analyzed the movement of Sensex vis-à-vis Sensex@MRP for a period of 10 years beginning FY 2000 and our analysis reveals that in the past whenever Sensex has crossed Sensex@MRP, sooner or later, a correction has taken place. This was visible during the tech boom of 2000, the rallies in 2006 and 2007 and most recently in January 2008.

Currently, quite a few stocks are trading above the MRP. The over-enthusiasm in the market is also evident from the fact that we are getting valuation requests for quite a few never-heard-of, un-profitable companies. 🙂

As sensible investors, we suggest you review your investments. If your stocks are quoting above their MRP and you have earned your expected returns, it is time to

CONSIDER SELLING YOUR STOCKS AND BOOKING PROFITS!

The last two days have been full of action for the stock markets. The week opened with Sensex, the benchmark index crossing the 19,000 mark for the first time since the peak of January 2008. More was to follow as the rally has continued today and has led to Sensex crossing Sensex@MRP for the June 2010 quarter which stands at 19295.

Sensex@MRP gives you an indication of whether the Sensex is fairly valued or whether irrationality is driving the markets. It is the intrinsic value of Sensex determined primarily by the earnings of the Sensex companies. So, the logic here is, if Sensex goes above Sensex@MRP, it signals that the market is moving from being rational to being irrational. It means you have to become cautious because if it continues to rise further, this rise is not justified by increase in earnings; it would thus be time to start selling off.

And this is what has happened over the last two days. Sensex has crossed the Sensex@MRP for the June quarter which stands at 19295. (You can read the detailed report here). The rise seems to be fuelled by funds pumped in by the FII. Just to give you an idea till the 13th of September (8 days of trading) net FII inflow in the equity market aggregated to Rs. 4,600 Cr. whereas from June till September 13th, net FII inflow has been Rs. 26216 Cr, which is higher than the inflow (Rs. 24,132 Cr.) for the entire year of 2009.

It could also be because of expectations of higher earnings for the September quarter. Whatever the reason be, one thing is for sure, that the market has crossed its fair value and has moved into the region of irrationality. If it moves further up, you can be rest assured that it is the irrationality that is driving the markets and not the fundamentals.

We have backtested and analyzed the movement of Sensex vis-à-vis Sensex@MRP for a period of 10 years beginning FY 2000 and our analysis reveals that in the past whenever Sensex has crossed Sensex@MRP, sooner or later, a correction has taken place. This was visible during the tech boom of 2000, the rallies in 2006 and 2007 and most recently in January 2008.

Currently, quite a few stocks are trading above the MRP. The over-enthusiasm in the market is also evident from the fact that we are getting valuation requests for quite a few never-heard-of, un-profitable companies. 

As sensible investors, we suggest you review your investments. If your stocks are quoting above their MRP and you have earned your expected returns, it is time to

CONSIDER SELLING YOUR STOCKS AND BOOKING PROFITS!

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