What is Market Value after all?

Every company has a value and that is deduced from it's financial statements. One of the most popular Fundamental ratios used to figure out if a company's stock is expensive at CMP or cheap is by using something called P/E ratio. The higher this ratio, the costly the stock is.

A higher P/E ratio however does NOT mean the stock is expensive and one should not buy it. Why? Because, a well sought after stock will always be in high demand irrespective of it's fundamental value. For example, Infosys or TCS during the late 90's which had extremely high P/E's but still had their share prices going up.

Similar to individual stock's P/E, you have the overall market P/E. For example, the one that we track on this page (with a link below) is for Nifty. Why is this important to you? Because this is what dictates (for the most part), if FII's and institutional investors should consider investing in the Indian market. Finding value that is. If P/E for the entire market is low, then you will see lot of demand and investment. Likewise the opposite when P/E is high. Take a look at the chart below.



In the chart above, everytime Nifty P/E went above 21+, it signaled danger as markets went down sooner or later. There hasn't been a single instance where markets rallied more than 10-15% AFTER breaching the 21 P/E level in the last 10 years. Similarly, whenever Nifty's P/E went below 13, markets stabilized and moved back up.



How to use the above charts and benefit from it?

Though the above chart is NOT Technical analysis, it is good to have a broader picture in mind before investing either from long/short or daytrading perspective. Why? Because in essence, if you can predict the trend before others, then you are one step ahead of them and would be able to invest more wisely.



Where do i find these charts?

Market Value Indicator