Is it Right Time to Exit Indian Equity Market ? ( A Data Driven Approach)

In the world of stocks, experiencing Bull and Bear phases is a common occurrence. During a Bull Market, everything appears to be flourishing, and portfolios thrive with remarkable returns. However, as retail sentiment becomes increasingly driven by greed, valuations begin to froth, signaling a potential struggle to sustain growth. It is during these moments that savvy investors, personally, I consider Foreign Institutional Investors (FIIs), exercise profit booking strategies to capitalize on the market's ebbs and flows.

Over the course of the past few months, we have been witness to substantial shifts in market dynamics, leaving both investors and analysts contemplating the path that lies ahead. Among market participants, a palpable sense of caution has arisen in response to these five months of extreme volatility, while conversely, another faction argues that this period merely marks the inception of a multi-year bull run. In the following article, we will embark on a journey into the depths of pertinent data and critical insights, aiming to provide you with a comprehensive understanding of the present market landscape and equip you to make well-informed investment decisions.

Here are the 3 data-driven decisions I look into to come to the right decision:

1. Price To Book Top 100 market cap valuation analysis

2. Retail Sentiment

3. FII cash inflows into the equity market

4. Stock-based accumulation index based on delivery data (Developing Stage)

Price To Book Top 100 market cap valuation analysis:

Before we go to any detailed analysis. Will explain how the algo and analysis is been done

Valuation Algorithm Logic:

• 1) Calculate the daily price-to-book value for each stock.

• 2) Determine the percentile at which each stock's valuation stands on a rolling basis.

• 3) Use a rolling window of 'x' days (in this case, 750 trading days or approximately three years).

Top 100 Stocks Selection:

• 1) At the beginning of each year, compile a list of the top 100 stocks based on market capitalization.

Tracking Valuation Percentiles:

• 1) Track how many of these top 100 stocks are currently trading above the 75th percentile.

• 2) Also, track how many of these top 100 stocks are trading below the 25th percentile.

I have encapsulated this dynamic analysis in the form of a graph, showcasing the trend of these top 100 stocks trading above the 75th percentile. This graphical representation offers a visual insight into the shifting landscape of high-valuation stocks.

Graph Insights:

The red line on the graph signifies a value of 60, indicating that if the line crosses this threshold, it means that more than 60% of stocks are trading at a 3-year high in terms of their 75th percentile valuation calculations.

Historically whenever count reaches the 60-65 range the market corrected significantly or never performed for at least 9-12 months

Now there is one more question. Is there any value in the market? For this, I check how many stocks trading at reasonable valuations. For this, I considered how many stocks trading yet less than the 25th percentile of the last 3 years' price to book. 

Value Assessment Thresholds:

• If the count of stocks trading below the 25th percentile crosses the range of 60-65, this indicates that there is emerging value in the market.

• Conversely, if the count falls below the range of 20-15, it suggests that there is currently less value available in the market for potential investors.

These thresholds serve as valuable indicators for gauging the overall attractiveness of the market in terms of valuation and can assist in making informed investment decisions.

Market Outlook Based on Valuations:

Currently market doesn’t any value to for fresh good money inflows and if market grows by another 3-5% max then the market reaches its peak high valuation zone. 

Example of How Midcap index reached at peak high valuation zone & No value zones

Graph Analysis (BSE MIDCAP CHART):

• Areas have been circled to indicate where the algorithm detects two key zones:

• High-Value Trap: The algorithm identifies instances when stocks are trading at high valuations, possibly indicating overvaluation.

• No Value Market Zone: The algorithm identifies periods where the market is perceived to lack value.

You will see similar kind of performance on All major indices like NIFTY 50 and Small Cap

Retail Sentiment:

Here I track the trends around the Multibagger Stock trend. What is been observed here when the retailer interest trend reaches its peak then FII’s start selling at huge levels and when the trend at its lowest FII’s start accumulating. 

Here the idea is indirectly to make investing decisions quite opposite to retailer interests as most of the retailers are known as dumb investors. Will come around a detailed analysis soon on this.

Right now the market on-trend level hasn’t reached its peak But, euphoria for the search for multi-bagger stocks is being clearly initiated

FII cash inflows into equity market:

A big flow of FII funds comes into the market when Market is not many stocks is trading at high value zone and many stocks trading at low value zones. On the same logic FII starts selling aggressively when market don’t have value to offer and many stocks trading at High Value Zone.

If you look into the FII’s cash inflows:

In September we have seen the second highest month in terms of selling stocks. Remember still we have one more week to complete September

If you look in September granularly

1. No of red days >> green days

2. On green days i.e. on net equity buying days the amounts are small

FII’s selling and not buying much during peak valuation times may not be considered as a good signal.

Conclusion:

Current Market Assessment:

The prevailing market conditions appear to lack substantial value, and the possibility of the market reaching its peak zone looms, with a potential increase of up to 6-11%. Foreign Institutional Investors (FII) have maintained a consistent selling stance, while retail investors remain caught in the throes of euphoria.

Cautious Approach Recommended:

Given the available data, a prudent approach is advisable, particularly when considering small- and mid-cap stock investments. The rapid ascent of these segments brings us closer to a peak characterized by frothiness. Regardless of the metrics or data points examined, it is evident that we have already entered this frothy territory. The only counterbalance to this trend lies in sustaining outstanding quarterly results, which is crucial for maintaining the momentum of such market movements. On the other hand, the large-cap index remains relatively stable, straddling a fair valuation without any pronounced bullish or bearish tendencies.

My Personal Action:

Personally had liquidated 50% of the portfolio on 22nd September given the market required a Cautious Approach and needed funds for some personal purpose

Will Liquidate my enquire equity portfolio once the Nifty 50 grow by another 6-9% above the sep nifty top levels

For now will do my sips in liquid funds or park money into a high-interest saving account

Will start investing the money in liquid funds or money in high-interest saving accounts aggressively in equity funds when the following three conditions are met. - Index near it's 200 Weekly Moving Average - There is a crisis or a perception of a crisis - Valuation are below long term average.

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