Nifty Valuation Tool: Find out if the stock market is expensive or cheap in multiple ways

Bollinger Bands

This technique helps us make better decisions with the 200-day moving average and also gives us insights on market volatility. Bollinger bands are essentially rolling standard deviation bands for the 200 DMA. The upper band is usually set two standard deviations above the 200 DMA and the lower band set at two below.

Volatility indication When the upper and lower bands converge with the 200dma moving up, it could mean bullish trend. When the upper and lower bands converge with the 200dm a moving down, then it could indicate a bearish trend.

You can spot both a bullish trend (200 DMA above the upper band) and the bands coming together (decrease in volatility). that does not happen often!!

Buy/sell indication With the bands reasonably spaced apart, if the price hits the upper band, it could mean an overheated market and a sell indication. That is a bearish market outlook. With the bands spaced reasonably apart, if the price hits the lower band, it could mean a buy indication.

Relative strength indicator

The simplest definition of the RSI is that it represents recent average gains divided by average losses. If the avg gains are higher than the index is overbought. If the avg losses are higher, the index is oversold. The problem with the RSI is similar to that of the PE or PB ratios. It is based on arbitrary high or low numbers.  I have plotted the 365-day RSI for the Nifty below. It is more useful as a buy indicator than a sell indicator.

A low RSI value is a reasonable buy indicator. Current values are not too high.

Nifty PE Valuation

The PE ratio is the current price divided by the earnings per share of the index. If the PE is “too high” then the market is paying too high a price for the earnings and must “correct” down (I hate that word now!). If the PE is “too low” then the market is paying too low a price and must correct up.

Have a look at the 10-year moving average (avg) of the Nifty 50 PE (the center line below).  The standard deviation (stdev) tells you how much each Nifty PE value deviates from the average.  The two lines above the central average line represent:

• avg + stdev
• avg + 2*stdev

Similarly, the two lines below the central average line represent:

• avg – stdev
• avg – 2*stdev

Typically when the current Nifty PE hits the +2 stdev line, it tends to come down (this is NOT mean reversion!), but the problem is, it need not come down too much!! So Current PE > + 2 stdev does not mean a crash!!

Nifty PB Valuation

Arguments made above can also be used to gauge valuation using the price to book value. The book value or shareholders is a measure of asset assets – liabilities. So it is a bit like the NAV of an ETF and the current market price the price of the ETF.

Again, a high PB could mean a “correction” and low PB, time to buy. A conservative market timer could use PB instead of PE.

Dividend Yield

The dividend yield is a contra-indicator. That is a low value could mean over-valuation and vice-versa. The dividend yield of a single stock is computed as the most recent dividend* / current price. A high dividend yield implies the stock price has moved up faster than its dividend and vice versa. Hence low div yield of the index points to overvaluation and vice versa. Current Nifty Dividend Yield is fairly low indicating overvaluation.

* Sometime multiplied by 4 to annualize it.

EPS one-year growth rate

Earnings per share = Price/PE. The one-year growth in the EPS is shown below. in 2002, a sudden drop in interest rates triggered the EPS growth rate and a bull run.  Notice that in recent years, there is virtually an absence of EPS growth. This is why I mentioned Do not start dreaming of a bull run even IF exit polls are right!! A bull run accompanied by an increase in EPS growth rate is a healthy bull run.

ROE or Book Yield

PB divided by the PE gives  Earnings per share divided by book value per share. This is also known as return on equity or book yield. This is a profitability measure. Unfortunately, this has been moving south. Again, an increase in price accompanied by an increase in ROE is a healthy bull run.

Nifty Valuation Tool Instructions Page

The user following the instructions in this page can paste any index data (price, PE, PB, Div Yield) and analyze valuation. Automated data download is not possible/feasible.

Disclaimer: The sheet provided below is informational/educational. It will tell you the results of various indicators but not when to buy, sell, or do anything else. That judgment is entirely up to the user. The sheet has been extensively tested for bugs, and there are no known bugs. However, it is impossible to guarantee that the sheet is free of errors. Users can bring issues to my notice for evaluation. I am not responsible for gains or losses that the user may suffer by using this tool.

The Nifty Valuation tool is priced at Rs. 1000

Get the Nifty Valuation Tool

You can also get Nifty PE Tool + Tactical Buy/Sell Tool as a combo deal for Rs. 1500.