Nifty PE ratio measures the average PE ratio of the Nifty 50 companies covered by the Nifty Index. PE ratio is also known as “price multiple” or “earnings multiple”. If P/E is 15, it means Nifty is 15 times its earnings. Nifty is considered to be in oversold range when Nifty PE value is below 14 and it’s considered to be in overvalued range when Nifty PE is near or above 22. The market quickly bounces back from the oversold region because intelligent investors start buying stocks looking to snatch up bargains and they do the exact opposite when Nifty P/E is in the overbought region.
NIFTY 1 YEAR PE CHART
Every time when Nifty’s Price/Earnings ratio exceeded 22, the average return from Indian equities over the subsequent three years became negative.
Nifty PE analysis with Nifty PE Ratio vs Nifty Chart
Nifty PE ratio is important as it is a measure of valuation of all the companies included in Nifty. From a long term perspective, low Nifty P/E ratio is considered cheap and ideal for going long. A high Nifty PE multiple, on the other hand, is assumed to be expensive and warrants caution while taking investment decisions (Booking profit or going short is a better strategy than going long in High PE ratio scenario). The same can be depicted from studying the Nifty PE vs Nifty chart above. When Nifty PE ratio is at its peak (in the range of 25 to 30), nifty is also at its peak and vice versa. It’s clear from the chart above that the stock market witnessed a sharp sell-off when nifty PE is near 28 -30 and witnesses heavy buying when nifty PE ratio is around 12 to 15.
|Very Expensive||25 to 30||It’s a rare event and Screaming sell. Search for shorting opportunities|
|Expensive||20 to 25||Book 80% Profit And Wait For Better entry Levels|
|Average||15 to 20||Buy Or Hold|
|Inexpensive||12 to 15||Screaming buy|
|Extremely Inexpensive||Below 12||Rare Event. screaming buy|