WILL THE MARKET CRASH ?

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You may have heard a lot of people nowadays saying that " be cautious, the market is about to crash", but the truth is that anything without research in the stock market is gambling. It's just like betting over an IPL match.

So in this article I will try to explain what I feel regarding the markets after doing my research. I will also make it clear on what basis I feel so.

I will divide the explanation regarding whether market will crash or not in two parts:

Fundamental Overview
&
Technical Overview

A) Fundamental Overview

In the short term Markets may move due to sentiments of traders but in the long run, market prices are a reflection of the earnings of companies. So one of the best ways to analyze whether the market is expensive or not is the PE ratio. The PE ratio is derived by dividing the market price of a company by its earnings per share (EPS).

Here we are analyzing the Nifty Index, which constitutes the top 50 companies of India registered on the National Stock Exchange. It is believed that if the PE of Nifty is above 30, it's very expensive and if it is below 20 its inexpensive. But now the PE is above 34-35, but still the market may not crash. Let us see why?

Here is the data of Price and Earnings of Nifty 50 from 01-01-2020 till 09-12-2020


As you can clearly see the earnings have declined but the price has continuously increased. The reason behind the decline in earnings is very simple, it is due to the pandemic but what about the increase in the price ? 

The reason is that the market is forward looking and each one of us know that from here things will get better with regard to performance of companies and economy also. 
If the earnings would have declined under normal conditions then yes we could say that the market will crash as PE is high but we all know the reason behind decline in earnings is something which has happened after around 100 years. 

Moreover PE ratio is not only driven by the Price, it also depends on earnings. So the PE ratio may come down in future due to the increase in earnings ( as it is the denominator).

So here I justified my view as per a fundamental research. Now let us understand this by Technical Analysis.

B) Technical Overview



Here you can see the lowest point of the candlestick chart is at 7500 level, that was the "crash" due to covid-19  in march, but since then you can clearly see the uptrend in the chart. As per my analysis Nifty has formed a strong base at around 12000 level.  The ATR ( average true range) is around 162, which indicates less volatility.  

The market may consolidate or fall, which is quite obvious in the short term but Nifty will maintain a strong base at 12000 level, we can see some correction may be due to profit booking but there will not be a " market crash".  It is the nature of the stock market that even in uptrend we observe some corrections but after that it rises again.

This was my view regarding the market conditions as of now after doing some research and as no one can predict the market so there is no guarantee that what will happen.


Shaurya Gupta
B.com Hons, University of Delhi
Financial Market Hons, Yale University


Disclaimer : 
All my views here are backed by my own research and it is just for spreading  awareness and for educational purposes only, I do not have any intentions to manipulate the markets. I may or may not have invested in the above mentioned securities.







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