When a market is bullish, do you really any sense of buying for long term? A bullish market is not meant to buy for long term rather the focus should be for short term. The market usually works in rally and whenever the market is off the track, you will witness the correction taking place in the market. If we look at the historical values for Nifty, then Nifty has shown many cases where the market was oversold in the range of 10-13 and was overbought in the range of 20-25. Once it reached the 20-25 level, it crashed and after reaching 10-13, it rallied.
It has been often when you as a trader must have missed these rallies considering the expert’s advice as true words of a saint. Never mind, most of the people who are not investors for long term and transact as a trader often keep missing these rallies. Sometimes, you need to have the guts to go against the sayings of the market experts. Now the questions that arise are, how I can make a correct estimate of the market potential, how do I know that the market is overbought or oversold?
There is one strong and easy to use tool is PE ratio which in fact is a very simple technique. The PE ratio is suggestive of the extent of the expensiveness or cheapness of the underlying. In other words, using PE ratio, one can easily identify the kind of value that the market can provide you irrespective of the price level.
Do you think that you need ample of information to take benefit of the market situation? Do you feel that you need to do a lot of market research before you can actually decide the time and amount of investment? Will reading the blogs and lot of stuff on the websites help you in taking a correct decision and helping you grab a good profit out of the market situations? Well, you don’t have to worry a lot on this. We can simply make use of PE based investing. Let us see, how we can use it.
Whenever you find that the Nifty PE has reached the level of 13, you need to begin mounting up the stocks by investing over next few months in installments. The word of caution is don’t invest in one go. In addition, you also need to ensure that the markets are going up and down and that the market is moving in a range. If the value of PE falls below 11 then it is purely a Buy Buy signal. By doing so, you can easily earn profits.
Now, once you find that the nifty PE has crossed 20, you can start booking the profits by selling. Again, you don’t have to sell all your holdings as this level of 20 does not necessarily mean that the market is going to fall back. Don’t be hasty. This level is only indicative of the fact that the markets may be oversold as lot of hasty and risk avoiders will start selling their holdings. So, the bottom line is that start selling in parts. If you find that the market is falling from the level of 20, then you must short sell. And if you find that the PE has crossed 25, then it is a purely Sell Sell situation.
Since now we have learnt how to make use of Nifty PE, it is also important to know from where one can get the data for PE ratio. You can get the data for Nifty from Nseindia.com and the data for PE can be obtained from http://www.nseindia.com/content/indices/ind_pepbyield.htm
If you want to transact in the market, then always remember that if you put all your money in the market in one go, you are calling a financial tsunami on your own. So, instead of putting all your funds in one go, always invest or buy in parts. Get the details on Nifty PE and take your decisions by using this simple tool and keep booking profits.