Midcap stocks at their highest
Today's ET carried this note From Vetri Subramaniam, so If you have not read it click the link, the highlight is that Large caps appear more safe over Midcaps where the PE re-rating has been faster
than earnings...My takeaway. Now Vetri is known to me for Long especially as he was the CIO when I joned Sharekhan and I may say I am here because of him. And there are few people who will tell you like it is. But I am using the story to publish two charts that I put out all of 2015-2016 as the market scaled a top each time to highlight the idea that we should know where we are.
This is important because even if I have turned a little bullish over the last year because of the commodities doing well Sugar Metals etc., back of my mind I know where we are. We are in bubble
territory and have been here longer than ever before. So if you participate in the market or invest in Mutual funds that are putting your money into Midcaps you need to revisit 1994. That said let the charts speak for themselves
The Nifty to Midcap ration first. Here I use the CNX Midcap that is now called the Nifty Mid100, The lower chart shows the Relative strength of the Midcaps over Large caps. Readings at
the upper end of the range have marked many major market highs. Divergences in the Nifty and Midcap index itself have also preceded major market turns. At the 2009 bottom as today both the RS and Divergence coexist making it an important reading.
Now since the above chart only shows you history from 2003 onward it can make you ask questions. So to those who do not know, before Midcap indices were invented there was the BSE 200 created by the BSE to represent the Midcap stocks as a basket. So divergences between the BSE 200 and Sensex were good at giving similar indications.
So in the chart below I use the Relative strength of the BSE 200 v/s the Sensex as a ratio to look at where we are. Now we have data going back to 1990 and readings at the upper end marked all the market tops of 1992-2000-2008 and we are there today and rising. The rise from the 2013 low point for the indicator is also one of the slowest on record. It has continued in a small channel even as the Sensex stopped making new highs since 2015. We are today at a near double top to 2015. But the
out-performance of the broad market as seen above has kept these indicators rising relentlessly. Valuations as discussed in the piece above match what these indicators are saying about the potential for future performance going forward. We are not in a pretty place no matter how long we stay here. Know it.
