Is the Market Overvalued?

Sensex and Nifty have hit lifetime highs with the Sensex moving past the 41,000 mark. In this article, we find out using long-term technical indicators if the market is overvalued.

Published: November 27, 2019 at 12:28 pm

On Nov 26th 2019, both Sensex and Nifty hit lifetime highs with the Sensex moving past the 41,000 mark. In this article, we find out using long-term technical indicators if the market is overvalued.

To do this, we shall adopt three different measures: (1) Trend via moving averages (2) Volatility using Bollinger Bands and (3) Valuation using PE, PB. The charts shown in this article (including other metrics) can be reproduced by readers via this tool: Nifty Valuation Tool: Find out if the stock market is expensive or cheap in multiple ways

State of the Market: Nifty Nov 2019

Exponential moving averages: Nifty

The daily moving average (DMA) is a simple measure where we compute the average of the last six month or last one year daily prices. The exponential moving average (EMA) is based on the simple moving average but give more weight to recent performance.

Notice that the Nifty 50 price is well above both the 6,12-month exponential moving average with the 6-month EMA above the 12-month EMA. This is the large cap segment is overvalued. However, (1) this indication alone is not enough to make conclusions and (2) it should be kept in mind that although a correction is possible it need not be significant.

In the same picture, prior to the Nov 2019 movement, one can count four such corrections. None of them was significant.

State of the market Nov 2019 exponential moving averages of the Nifty

Bollinger Bands: Nifty

Bollinger bands are two lines drawn above and below the 200 DMA. The bottom line or lower band as it is called is two moving standard deviations below the 200 DMA. The upper band is two standard deviations above the 200 DMA. Created by John Bollinger, they combine “trend” and volatility.  A description of how they can be used is found here:

The current state of the Nifty is shown below. Although the price is above the top band, notice the top and bottom bands have converged indicating lower volatility.  This indicates a neutral position: neither overvalued nor undervalued.

Bollinger Bands of the NIfty Nov 2019

Nifty PE

The 10-year average of the Nifty and +1,+2,-1,-2 and standard deviation above/below the average are shown below. Over the last 11 years, the 10-year NIfty PE average has moved up from a little less than 18 to about 22.  So the definition of a “high PE” is continuously changing.

Moving Average of Nifty PE Nov 2019The current Nifty PE is hovering between the average + standard deviation (+1) and average + 2standard deviation (+2) lines. For the last five years or so, this has been the case except for two significant deviations below. So it not clear from this if a fall is imminent or not.

Nifty PB

The corresponding values for Nifty PB are shown below. The Nifty PB has recently dropped below the 10-year PB average. The PB has rarely gone above the +1 line. If we go by this chart, there is not too much room at the top.

Moving Average of Nifty PB Nov 2019

State of the Market: Nifty Midcap 150 Nov 2019

Let us now look at the corresponding chart for Nifty Midcap 150.

Exponential moving averages: Nifty MIdcap 150

The 6-month EMA is still below the 12-month EMA while the price just above both. This indicates that the market is just rightly valued.

State of the market Nov 2019 exponential moving averages of the Nifty MIdcap 150

Bollinger Bands: Nifty Midcap 150

Compared to April 2018, the volatility bands are considerably narrow indicating lower volatility with the price heading towards the top band. Again this indicates neither over- or undervaluation.

Bollinger Bands of the NIfty MIdcap 150 Nov 2019

Nifty Midcap 150 PE

The Nifty Midcap 150 PE and PE history is not as much as that of Nifty. So the ten-year average PE/PB cannot be taken too seriously. With the current PE close to the average, there appears to be good space for midcap stocks to move up.

Moving Average of Nifty MIdcap 150 PE Nov 2019

Nifty Midcap 150 PB

The current Nifty Midcap 150 PB is higher than its ten-year average. So again this means that these stocks are probably still priced high.

Moving Average of Nifty MIdcap 150 PB Nov 2019


Readers may have noticed that the inferences from different indicators do not match. This is often the case. In the large cap space, the volatility is lower than in the recent past but the PB is close one standard deviation above the 10-year average. Meaning there is not a lot of room for moving up.

In the mid-cap space, the PB again seems to indicate high-priced stocks, but this is not reliable as the history is too short. The volatility is low, but one cannot clearly say if there is potential for upward expansion. Looking at the PE alone here could be misleading.

As pointed out above, the charts shown in this article (including other metrics) can be reproduced by readers via this tool: Nifty Valuation Tool: Find out if the stock market is expensive or cheap in multiple ways

Do share if you found this useful

We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Join our courses in exclusive Facebook Groups!

  • 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps