Sensex at an all time high of 30,000. But, avoid the risk of entering market now

If you are really enthused about investing in the stock markets today (Thursday) after reading newspaper headlines that announced that Sensex had settled above 30,000 mark for the first time – you really need to calm down.

It is at times like these that the common man thinks of entering the stock market with the hope of making some money. However, stock markets on all-time high are not places to make a quick buck.

To give you an example, on 4 March 2015, the S&P BSE Sensex hit an intra-day high of 30,024.74 and closed at 29380.73 at the end of the day. The investors and analysts called it a rally that had just begun. It was in line with ace India investor Rakesh Jhunjhunwala prognosis.

Jhunjhunwala had said that Indian equity markets would witness the mother of all bull runs in May 2014.

But, by 7 May 2015, the Sensex was back to 26,599.11 points – little more than 9% decline in the value. By 11 February 2016, Sensex had touched a two-year low at 22951.83 points.

First of all, all such headlines are misleading as the Sensex had crossed the 30,000 mark to touch 30,024.74 within minutes of opening, only to settle at 29,380.73.

The carnage of February 2016 rode on the back of global cues, with most markets in the world trading lower due to uncertainty in the US economy. A bigger concern was the performance of the Indian corporate sector.

According to CRISIL Research, corporate revenue (excluding banking and oil & gas companies) were expected to grow at a just 2% in the three months leading to December 2015.

The current situation is worrisome as well. According to a report by Mint, the Sensex is trading at 17.74 times its estimated fiscal 2018 earnings, at a nearly 20% premium to its five-year average of 14.8 times.

The newspaper quoted Kotak Securities Institutional Equities analysts, Sanjeev Prasad saying – “We are unable to fathom the rapid changes in the prices of stocks without any major changes in their fundamentals.”

Consensus fiscal 2018 earnings for the Sensex have been downgraded by 3.2% since February this year and 1% since April, according to Bloomberg.

An analyst with a domestic brokerage firm said, “There is a lot of liquidity in the market from domestic institutional investors (DII) post the note ban. Mutual funds have been pouring money into the stock markets as their fund base has increased. But there needs to be caution as the rising rupee valuation against the dollar is going to harm the IT companies' earnings. The telecom sector is already under pressure. There is scope for a correction in the market.”

Around Rs 7,000 crore has been invested by DIIs in April 2017 pushing the Sensex above 30,000 mark on Wednesday.

Time to book profit

While it does not make sense to enter the market now in search of profits, those who had entered the market last year when the Sensex was below 25,000 have a chance to book profit now.

Sooner or later the sanity will return to the market with companies getting valued on their real growth prospects in the coming quarters. That would be the time when there would be a sudden fall in the indices – just what we witnessed last year.

Before that happens, it is time for those already sitting on profits to exit the market and wait for the valuation to become attractive again.

Sensex was trading at 30,112 points at the time of publishing this story.