5 reasons why market is complacent

5 reasons why market is complacent
28 Sep, 2007, 0310 hrs IST,Pravin Palande, TNN

1. First, the equity earnings yields (the inverse of PE ratio) is at 4.77%. The equity market is attractive when earnings yield is higher than that of bond yield. Today, 10-year bond yield is at 8%. When earnings yield is almost half that of the government bond yield, it indicates a clear complacency. Investors want to look at the next year’s PE of 18.14 which gives an earnings yield of 5.51%. This, according to them, makes the market look very comfortable. Investors expect the equity market to go up irrespective of any events. Again, justifying that the market at a PE of 18.14 may not be a great idea.

2. The implied volatility of Nifty is falling. In other words, investors feel that the market will not be choppy, given that the Sensex has seen an amazing run. The volatility in Nifty is 14%, a level seen two months ago when it was at a lower level. Since, the market has moved up 7% in the past two months, the volatility number should have been higher. This shows that investors are under the impression that there are no bumps ahead.

3. Open interest positions in Nifty futures are rising. Almost 77% of the positions have been rolled over on Thursday to October contracts. Simply put, investors may be taking big bets in derivatives. The October contract of the Nifty is in heavy demand. The market looks optimistic for the coming month, at least going by the Nifty futures positions.

4. Bank stocks are moving up as the market is betting on a rate cut even though there are no such indications from RBI. Over the past two weeks, the Nifty banking index has moved up 15%. Any kind of rate cut is seen as a positive, since it makes money cheaper and leveraging easier. At a time when the Sensex has hit 17K, expecting cheaper money may be wishful thinking.

5. Investors are reading too much into the recent capital outflow liberalisation measures. Many feel that the rupee will turn weaker with more outflow and it’s time to buy IT stocks or cover short-positions in software scrips. The fact is it could be too little, too late. Besides, net FII investments are rising. Since September 20, FIIs have been net buyers of Indian equity. On September 27, net investment was Rs 1,004 crore. These numbers are fuelling in the feel-good sentiment.