Indian Stock Market crash or Correction is likely in 2018?
There is a strong probability that Indian Stock Market Correction will happen in 2018.
Sensex is trading at all time high of 35,000+ levels. Nifty is also trading at all time high levels of 10,800+.
Since Jan’2017 Sensex and Nifty has been only bull.
Sensex jumped almost 7,500+ points in last 12 months. Nifty has taken a jump of 2,400+ points in last 12 months.
In all probabilities, there is a strong hint that stock market is due for a correction soon.
Though against our apprehensions (since Aug’17), both Sensex and Nifty has only climbed up.
In Aug’17, when I first said that Stock Market Correction may happen soon, the Sensex has Jumped from 31,300 levels to 35,400 levels (4,000 points).
So what I have to say now?
This big upswing, in last 6 months has further strengthen my claim that correction is only around the corner.
The only limitation with my apprehension is that, now I am not sure when it is going to happen.
Between 01-Aug’17 and 29-Aug’17, the Sensex slipped from 32,500 to 31,400 points.
This was a slip of almost 1,191 points in a matter of 29 days.
At that point I thought that, the correction has started to show its signals.
There is no doubt that the market is overvalued as on today (Sensex: 35,400 levels). The correction mode will start, but only god knows when.
Big investors must be booking profits at these levels. Now is the time time when mutual funds will also do the same.
If this is true, then stock market correction is very likely by middle of 2018.
Sensex trend in last 6 months…
In last 6 months, defeating all cautions, Sensex has only jumped to higher levels.
So the question remains, what we shall do now?
This is a valid question because stock market corrections can be tricky.
Whether this correction is going to be a big one, or it will be minor?
If correction is minor, then lets get back to work.
But if the probable correction is going to be major, then lets pack some cash and keep it ready for investing. It will be the time to play the money game soon.
There are indicators which is giving a strong hint that this stock market correction of 2018 is going to be a major one.
Of course, it will not be like 2008 stock market crash, but it will be enough to make value investors excited.
So what are the indicators I am talking about?
We will use key reference points (dates) of the past and compare how Index, Index P/E, Index Dividend Yield, and Index P/B ratio behaved on these dates.
This comparison will give us a near estimate of how close we are to the stock market correction.
The dates that we are considering are as below:
(a) Dec’2007 – This was that month on which the famous 2008 stock market crash started. Here the Sensex crashed from 20,700 points to 8,300 points in a matter of 14 months.
(b) Dec’2010 – This was that month where Sensex corrected itself by almost 4500 points. From Dec’2010 the Sensex fell from 20,000 points to 15,500 points in next 13 months.
(c) Jan’2015 – This was that month where Sensex corrected itself by almost 6000 points. Since Jan’2015 the Sensex fell from 29,200 points to 23,100 points in a matter of 13 months.
Note: Please see a pattern. In case of stock market crash or major/minor corrections, the bear phase has lasted for close to 12+ months.
#1. Stock Market Index
Before the stock market crash of 2008, Sensex was only moving up without any major correction (since 2003).
But the the actual bull run started from middle of 2005. Probably it was one of the longest bull run which lasted for almost 30 months.
But the more alarming rise in prices was more predominantly seen in S&P BSE 500 index.
By the time Sensex reached 20,287 and S&P BSE 500 reached 8,592 points it was already Dec’2007.
The same kind of pattern can be seen in today’s stock market as well. Post Feb’2016 when Sensex recorded a low of 23,000 points, the index has been going up consistently.
In fact, since Feb’16, Sensex has been trading higher and higher since last 18 months.
This bull run has been so fantastic that Sensex touched all time high of 32,000+ points on 01-Aug’17.
A very similar growth trajectory has been seen for S&P BSE 500 index as well. On 01-Aug’17 this index cross 13,700+ points.
Comparing 2008-09 and 2016-17 charts, time horizon and market peaks; it is looking almost certain that stock market correction in 2017 is around the corner.
Post 2008 stock market crash, Sensex rose to 20,500 points and S&P BSE climbed to 7,900 points by Dec’10.
The Sensex rose from 8,900 points in Feb’2009 to 20,500 points by Dec’2010. This was a massive jump of 11,500+ points in a matter of 23 months.
Such huge gains is understandable as the stock market was recovering from one of the most severe crash of all times.
This is also one reason why the bull run (post 2008 crash) continued for a time period of 23 months.
Comparing 2009-10 and 2016-17 charts, time horizon and market peaks, it is looking almost certain that stock market correction in 2017 is around the corner.
A very similar analogy can also be drawn for stock market correction triggered in Jan’2015.
Sensex and S&P BSE 500 kept growth from Dec’2011 to Jan’2015. This bull run continued for almost 36 months.
In the first 14 months the growth was only moderate (UPA government).
But in 2013, when NDA government came to power in New Delhi, after that the stock market touched new highs.
In Jan’15, for first time Sensex peaked at 29,000+ points.
During that time it was evident to everyone that, due to optimism created by the NDA regime, the market bubble is building. The mood inside India was very upbeat.
But no bubble can remain in existence forever.
Hence the bubble ultimately burst post Jan’15. The Sensex tumbled down by more than 6,000 points.
Comparing 2012-14 and 2016-17 charts, time horizon and market peaks, it is looking almost certain that stock market correction in 2017 is around the corner.
Similar to 2015, Sensex and S&P BSE 500 has again touched all time highs in Aug’17.
The correction has already started and it is likely to continue further. The speed will be slow but it will eat Sensex gradually.
My personal assumption is that, Sensex will fall by at least 5,000 points in a span of 12 months.
Note: Sensex has already slipped 1190 points in last 29 days.
#2. P/E Ratio of S&P BSE 500 & of Sensex
Historically it is clear that whenever P/E ratio of the index has crossed a limit, stock market has crashed or has corrected itself.
In Dec’2007, P/E ratio of S&P BSE 500 was trading at a whopping 27.57 levels. Similarly P/E ratio of BSE Sensex was trading at 26.95 in Dec’2007.
Hence the market crashed in 2008-09.
In Dec’10 and Jan’15, the P/E ratio of Sensex and of BSE-500 was trading 20+ levels. Again the stock market crashed.
Today in Aug’2017 P/E of BSE-500 is 26.01 and of Sensex is 23.82 (they are are +20 levels).
Comparing P/E ratio of Dec’07, Dec’10 & Jan’15 with Aug’17 in charts, it is looking almost certain that stock market correction in 2017 is around the corner.
#3. Dividend Yield of S&P BSE 500 & of Sensex
When stock market peaks, dividend yield of index bottoms.
In Dec’2007, dividend yield of BSE-500 touched a low of 0.76. Same for Sensex was a low 0.85. These dividend yield levels (in India) is like rock bottom.
After this we saw the stock market crashed.
In Dec’2010, dividend yield of BSE-500 became as low as 0.89 and of Sensex was 1.05. After this we say a moderate stock market correction.
In Jan’2015, dividend yield of BSE-500 became was 1.15 and of Sensex was 1.2. After this we say a major stock market correction.
Today in Aug’2017, dividend yield of BSE-500 is 1.21 and of Sensex is 1.23.
If we see the chart and its movements/trend alone, it is a clear hint that the stock market correction in 2017 is very near.
But looking alone at dividend yield figures, they are still high.
Hence from dividend yield per say, it looks like possible correction is not going to happen soon.
#4. P/B ratio of S&P BSE 500 & Sensex
If we see the P/B ratio of BSE-500 in 2007, it was at a all time high of 6.38.
Even the P/B ratio of Sensex was as high as 6.54.
With these indicators in place, stock market crash of 2008 was inevitable.
But today in Aug’2017, P/B ratio of BSE-500 is only 2.91 and of Sensex in 3.06. The P/B ratio is less than half of what it was in 2007-2008.
These P/B ratios of Aug’17 are even lower than the P/B ratio of same index in Dec’2010.
In Dec’2010, before the market corrected itself, P/B ratio of BSE-500 was as high as 3.71 and of Sensex was 3.73.
So if we compare, Dec’2010 and Aug’17, it doesn’t look like correction any time soon.
But if we compare P/B ratio of these indices with that of Jan’15, it hints at possible correction.
In Jan’2015 before the market corrected itself with P/B ratio of BSE-500 at 2.33 (now its 2.91) and of Sensex was 3.06 (now its 3.73).
Looking at P/B ratio figures and trends, there looks to be only 45% chance that stock market correction is happening any time soon.
Conclusion: So stock market crash is happening in 2018?
If I have to vouch for myself alone, I would certainly say YES.
Looking at Index (S&P BSE 500 & Sensex), correction looks almost certain.
But currently the index’s momentum is not saying so.
P/E ratio is another indicator which is saying that stock market correction will happen any time in 2018.
S&P BSE 500 PE ratio has already crossed 28.76. In year 2008 it was 27 when the market crashed.
Dividend yield and P/B ratios are not hinting at an immediate correction.
So talking for myself, I will keep my hard cash parked safely in savings account.
When the stock market bottoms, only then I will use them to buy few best stocks of Indian stock market.
These are the moments where timing the market is most essential.
But for sure, what I am saying is only a guess work based on historical patterns. Whether my assumptions will come true or not, only time will tell.
So lets wait like an eager hawk to see if corrections are happening sooner or later.
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