Why Indian share market is going down today – 2018?

Indian Stock Market Crash Likely in 2018 - FeaturedImage

Why Indian share market is going down today? The answer is, it was only inevitable. Why?

When I first wrote this post in Aug’17 last year, Sensex was trading at all time high levels of 32,500.

That time people were comprehending that, Indian stock market crash (or correction) is likely to happen in late 2017 or 2018.

The probability was strong, and today in Oct’2018, we are witnessing a major correction.

Why I say major correction? 

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On 24-Aug’18, Sensex was at 38,890 levels. Today on 29-Oct’18, Sensex is trading at 33,500 levels.

This is a fall of 5,390 points (13.85%) in a matter of 2 months. 

What made people to start prejudging Sensex fall in Aug’2017 itself? It was only at 32,500 levels then…

Yes, today in hindsight, 32,500 levels is looking weak, right? But in Aug’17, when Sensex was at 32,500 it was already trading at record high levels.

Before Aug’17, the highest Sensex ever reached was 29,600 (in Jan’15). 

So Aug’17 levels (32,500) was already a record high level for Sensex.

Moreover, as a rule of thumb, every 10 years, stock market crash happens almost voluntarily.

Last time we had a major stock market crash in 2008.

So almost 10 years has passed, and in all probabilities, there is a strong hint that stock market is due for a correction soon.

When I say “strong hint”, what are these strong hints?

I mainly derive strong hints by looking at historical trend of Sensex with respect to the following ratios:

  • P/E ratio of Sensex.
  • P/B ratio of Sensex.
  • Dividend Yield (DY) of Sensex.

In this blog post we will see how these ratios changed with time, leading to the presumption of a market crash / correction in 2018-19.

#1. Major Corrections or Market Crashes in India in last 20 years…

Why Indian share market is going down today 2018 -Sensex4

If we go back 20 years from today, the Indian stock market saw major corrections and crashes in the following years:

  1. Crash: 2000-01
  2. Crash: 2008-09
  3. Correction: 2010-11
  4. Correction: 2015-16

What is the difference between stock market crash and correction?

When stock market has fallen by more than 40%, call it a crash.

When stock market has fallen by more than 20%, call it a major correction.

What is the point? Why I am giving reference of these historical events?

There are 4 major points in Sensex’s history which we will study here.

What we will study?

What were the fundamentals of Sensex at the points, beyond which stock market crash/correction happened.

Which fundamentals we will look at? 

  • P/E ratio of Sensex.
  • P/B ratio of Sensex.
  • Dividend Yield (DY) of Sensex. 

What is the objective of doing this exercise? 

We will do this study to analyse and judge, if the present stock market fall of 2018 is going to be a crash or a major correction. 

It may also be the case that, none of these (crash or major correction) happens.

How to judge this? This can be done by studying the past trend of Sensex’s P/E, P/B and dividend  yield. 

We will use this analysis to make Sensex predictions for 2018 -2019.

How we will do it? We will analyse the tipping point of the following stock market crashes:

  • Year 2000-01.
  • Year 2008-09.
  • Year 2010-11.
  • Year 2015-16.

#2. Year 2000-2001: Stock Market Crash

Why Indian share market is going down today 2018 -Sensex2000-01_1

What is visible from the above stock market trend?

Sensex peaked in Feb’2000.

So the question to be asked is, at this point what were the fundamentals of Sensex?

Sensex bottomed in Apr’2003.

At this point what were the fundamentals of Sensex?

Feb’2000 (Overvalued) :P/E = 24.32, P/B = 3.98, DY = 1.00

Apr’2003 (Undervalued) :P/E = 13.21, P/B = 2.06, DY = 2.37

So what we can conclude from here? There can be three conclusions:

First, Sensex becomes too overvalued at P/E of 24.32, P/B of 3.98 and D/Y of 1.00. 

Second, At these overvalued levels, there is high chance that Sensex might correct or crash. 

Third, When Sensex’s fundamentals reached levels like P/E of 13.21, P/B of 2.06 and D/Y of 2.37, it can be said to be undervalued. 

What does it mean?

At overvalued price levels, Sensex will crash. This is the point where investors must start taking closer look of the index.

Every time Sensex reaches such overvalued levels, it may crash and fall by almost 50%.

Note: This Crash happened when Sensex was at all time high of 6,150 levels.

Another point to note here, the bear market continued for almost 2.5 years.

#3. Year 2008-2009: Stock Market Crash

Why Indian share market is going down today 2018 -Sensex2008-09

What is visible from the above stock market trend?

Sensex peaked in Dec’2007.

At this point, the fundamentals of Sensex was very similar to that of Feb’00. But 2007 peak was more drastic. 

Sensex bottomed in Feb’2009.

At this point, the fundamentals of Sensex was again very similar to that of Apr’03. But the fall in 2008-09 crisis was more severe. 

How we can say so? Lets look at he fundamentals of Sensex:

Dec’2007 (Overvalued) : P/E = 26.94, P/B = 6.54, DY = 0.85

Apr’2003 (Undervalued) : P/E = 12.82, P/B = 2.5, DY = 1.89

So what we can conclude from here? There can be three conclusions:

First, Sensex was more bullish in Dec’2007 as compared to Feb’00. Compare P/E, P/B & DY, you will know what I mean.

Sensex became too overvalued at P/E of 26.94, P/B of 6.54 and D/Y of 0.85.

Second, again at these overvalued levels, there was a high chance that Sensex was going to crash like 2000-01.

Third, Sensex’s fundamentals reached (in Feb’09) levels like P/E of 12.82, P/B of 2.5 and D/Y of 1.89, which made it very undervalued.

In 2008-09 stock market crash, it will not be wrong to say that Sensex’s bull run continued so much that it created a “bubble”. 

When this bubble bursted, it carried with itself the Sensex almost 56% down. 

The crisis of 2008-09 was one of the worst crisis in stock market history of the world. 

What we can conclude in general here?

Every time Sensex reaches such overvalued levels (like P/E of 26.94), it may crash and fall by almost 50%.

Note: The Crash happened when Sensex was at all time high of 20,200 levels.

Another point to note here, the bear market continued for almost 14 months

#4. Year 2010-2011: Stock Market Correction

Why Indian share market is going down today 2018 -Sensex2010-11

What is visible from the above stock market trend?

Sensex peaked in Dec’2010.

At this point, the fundamentals of Sensex was not as severe as 2001 or 2008, but it almost touched the PE23 levels. 

Sensex bottomed in Dec’2011.

At this point, the fundamentals of Sensex looked undervalued particularly seeing its PE17 levels. For sure it was not as undervalued as 2001 & 2009. 

How we can say so? Lets look at he fundamentals of Sensex:

Dec’2010 (Overvalued) : P/E = 22.93, P/B = 3.73, DY = 1.05

Dec’2011 (Undervalued) : P/E = 16.92, P/B = 3.22, DY = 1.58

So what we can conclude from here? 

The Correction happened when Sensex was at all time high of 20,500 levels.

Though Sensex was not as overvalued as that of 2001, 2008 but it still corrected itself. 

At this point, Sensex fell by 24.64%.

What we can conclude from here? PE23, PB3.73 and DY1.05 are those levels where stock market can be said to be overvalued. 

Another point to note here, the bear market continued for almost 12 months.

#5. Year 2015-2016: Stock Market Correction

Why Indian share market is going down today 2018 -Sensex2015-16

What is visible from the above stock market trend?

Sensex peaked in Feb’2015.

At this point, the fundamentals of Sensex was at PE19.68 levels. This is not very severe (compared to 2001, 2008 & 2010), but here Sensex was at all time high of 29,361

Sensex bottomed in Feb’2016.

At this point, the fundamentals of Sensex became comparatively undervalued. 

How we can say so? Lets look at the fundamentals of Sensex:

Feb’2015 (Overvalued) : P/E = 19.68, P/B = 3.09, DY = 1.16

Feb’2015 (Undervalued) : P/E = 17.48, P/B = 2.55, DY = 1.52

So what we can conclude from here? 

The Correction happened when Sensex was at all time high of 29,361 levels.

Though Sensex was not as overvalued, but it still corrected itself. The reason may be attributable to all-time-high levels of Sensex. Why?

Because it gives a sense of a probable “profit booking point” to investors.

But seeing the PE, PB & DY levels, Feb’15 was certainly not a very overvalued point. 

But this point, Sensex fell by 21.66%. It was a major correction but at moderate levels. 

Another point to note here, the bear market continued for almost 12 months.

Sensex-PE Vs Sensex: Leading to conclusion

Sensex is overvalued or undervalued in Oct’18?

Why Indian share market is going down today 2018 -SensexVsPE
YearPESensex
Oct-1822.233,291.58
Sep-1824.0535,985.63
Aug-1824.4937,128.99
Jul-1823.0535,106.57
Jun-1822.9134,784.68
May-1823.4134,302.89
Apr-1823.4332,972.56
Mar-1823.0132,483.84
Feb-1824.0433,482.81
Jan-1825.6933,703.37
Dec-1724.6732,565.16
Nov-1724.6232,683.59
Oct-1724.1631,440.48
Sep-1723.7931,081.83
Aug-1723.7931,128.02

What is shown in the above chart?

Important is note how Sensex Index and Sensex PE is moving with respect to each other.

Between Aug’17 & Jan’18:

PE rose from 23.79 to 25.69. Up by 7.98%.

Sensex rose from 31,128 to 33,703. Up by 8.27%.

Sensex index grew at a rate slightly faster than its PE growth. 

What does it mean? Signs of index going overboard (overvalued). 

Between Jan’18 & Mar’18:

PE fell from 25.69 to 23.01. Down by 10.43%

Sensex fell from 33,703 to 32,483. Down by 3.62%.

Sensex-index fell by only 3.62% when its PE fell by more than 10%.

What does it mean? Signs of index becoming very overvalued.

Between Mar’18 & July’18:

PE rose modestly from 23.01 to 23.05. up by 0.17%.

Sensex rose from 32,483 to 35,106. Up by 8.08%.

Sensex PE remain almost constant, but still the index rose by 8.08%.

What does it mean? Again, it is a sign of index becoming very overvalued.

Between July’18 & Aug’18:

PE rose from 23.05 to 24.49. Up by 6.2%.

Sensex rose from 35,106 to 37,128. Up by 5.75%.

Sensex Index rose slowly compared to Sensex PE. 

What does it mean? Sensex showing signs of a possible future correction.

Between Aug’18 & Oct’18:

PE fell from 24.49 to 22.2. Down by 9.35%.

Sensex fell from 37,128 to 33,291. Down by 10.33%.

Sensex index falling at a rate faster than its PE decline.

What does it mean? This is a sign that probably this market correction is catching momentum. 

How far the Stock Market will fall in 2018-19?

Frankly speaking, it is any mans guess. 

But based on my assumptions, this time the Sensex will go down by at least 20%.

Why I say so? Reason being:

  1. Weak Rupee. 
  2. Rise in Oil Prices.
  3. Loksabha Election in 2019.
  4. Stock market crash is due.

These are four reasons which will take Sensex below 28,000 levels.

These are not just any small-reasons. They are going to become stronger and stronger in next months. Why?

Iran sanctions are around the corner. Oil price will further go up, leading to inflation.

Increasing oil prices, means more demand for USD. This will further strengthen the USD (leading to weaker Rupee).

With Loksabha elections coming closer, sense of political uncertainty may further pull Sensex down.  

Conclusion:

My assumption is, Sensex PE will go down this time to at least PE19 levels.

At these PE levels, I think, Sensex will be trading at 28,000 levels. 

So my Sensex forecast for 2018-2019 will be a sure decline to 28,000 levels. 

This will make the Indian stock market a lucrative buy for long term investors. 

Though I am not very sure if a stock market crash (down 50%) is possible or not, but a 20 odd percent decline is looking obvious. 


Hi. I’m Mani, I’m an Engineering graduate who in pursuit of financial independence, has converted into a full time blogger. After working in the corporate world for almost 16+ years, I bid it adieu....read more

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Disclaimer: None of the articles, products etc should not be treated as investment advice. All types of content provided here are for casual reference and for informational purposes only. It should not be considered financial advice. You should consult with your professional expert before application of any information provided here.

6 Comments

  1. If PE and sensex were to rise and fall by the same percentage, will the sensex value rise? I afraid it will stay at the same value forever if it were to rise and fall by the same percentage as PE.

    • If PE of Sensex rises (in a day), it means Sensex has gone up and vice versa. When PE of Sensex remains at the same level (in a day), then Sensex will also remain at the same level as yesterday’s levels.

      • So you were comparing the change in percentage and assuming overvalued or undervalued. By that, do you mean percentage change in PE and Sensex to be same?

      • No, the comparison must be made on absolute values. The values of PE, PB, Sensex level, DY are all “comparative” indicators.

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