project on safety zone for investor

8/6/2019 Project on Safety Zone for Investor

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IDENTIFYING SAFE TRADING ZONE FOR INVESTORS IN INDIAN STOCK MARKET:

Identifying Safe Trading Zonesfor Investors

In

Indian Stock Market

ACADEMIC SESSION2009-2011

UNDER THE GUIDANCE OF: SUBMITTED BY:

Ms. Manisha gupta Akanksha Mohi

Lecturer Roll No: 109006

PIMT,Gobindgarh

PUNJAB INSTITUTE OF MANAGENET $ TECHNOLOGY

MANDIGOBINDGARH PUNJAB.

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No good work flows without the help from Faculty Members, Industry

Professionals, Colleagues, Organization and Friends.

ACKNOWLEDGEMENTAny assignment puts to litmus test of an individual knowledge, credibility or experience and thus

sole efforts of an individual are not sufficient to accomplish the desired successful completion of

a project which involved interest and effort of many people and so this becomes obligatory on

my part to record my thanks to those who helped me out in the successful completion of my

dissertation.

Life is a process of accumulating and discharging debts, not all of those debts can

be measured. I cannot hope to discharge them with simple words of thanks but I can certainly

acknowledge them.

Project report is a bridge connecting the educational qualification and the

professional use. Before getting to brass tacks of things; we would like to add a heartfelt word

for the people who have helped us in bringing out the creativeness of this project.

I would like to express my heartiest thanks to Ms. Manisha Gupta Faculty,

PIMT, Mandigobindgarh, Punjab who truly remained driving spirit in my project and her

experience gave me the light in handling research project and helped me in clarifying the

abstruse concepts, requiring knowledge and perception, handling critical situations and in

understanding the objective of my work.

Again, I sincerely thanks.Akanksha Mohi

MBA 4th A

Anybody can do a work but very few can excel it and they are said to be repository of

expertise skills of that work

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PREFACE

MBA is a stepping-stone to the management carrier and to develop good manager it is

necessary that the theoretical must be supplemented with exposure to the real environment.

Therefore the research product is an essential requirement for the student of MBA. This

study would not only help me as a management student to gain a deep insight of how things works

but also to put practical usage of all the management techniques that I have learnt during the course

of my study.

It also provides a chance to the organization to find out talent among the budding managers

in the very beginning.

I chose the project title Identifying Safe Trading Zones for Investors in Indian Stock

Market which was a great learning experience.

This project helped me analyze the difference between the realities and the theories that

have been taught in my academic sessions and also gave me a real experience of the corporate world.

This project also helped me in understanding the working & functioning of the stock

market in a better way. It also taught me how to take every experience in the right way and learn

from each one of them.

Finally the analysis of the report and the recommendation made by me should be

practically feasible to be put to test in real life situations. I shall consider all my hardwork

worthwhile if this endeavor of mine is able to satisfy all those concerned and proves useful to

anyone or for any further study in the future.

I hope that the words of projects will communicate the actual of experienced gained with

subtlety and precision, which is unapproachable, by any other means.

CERTIFICATE OF APPROVAL

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DECLERATION

TABLE OF CONTENTS

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5 The Dark Side Of TheIndian Stock Market

31

Dot Com Bubble 31-32

Harshad Mehta Scam 33

Ketan Parekh Scam 35

Stock Market Crash of2008

36-38

Fig. 5.1 37

6 Stock Market Cycle 40

Four Phases 41-43

Four Phases Fig. 6.1 41

7 Research Objective 45

Research Approach 46

P/E Ratio 46

Market P/E Ratio 47

Normal Distribution-Fig. 7.1

48

S&P CNX Nifty 49

Oversold andOverbought Zone

50-52

8 ANALYSIS 54

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P/E Returns Plotted onNormal DistributionCurve at 20%,10%

54-56

Normal DistributionGraph At 20% Fig. 8.1

54

Normal DistributionGraph At 10% Fig. 8.2

56

Market P/E ReturnsSince 2000 Fig. 8.3

57

P/E Returns of BSEOver The Last YearFig. 8.4

58

RSI 59

RSI GRAPH Fig. 8.5 60

DOW THEORY 61

9 FINDINGS &RECOMMENDATIONS

65

10 CONCLUSION 67-68

11 LIMITATIONS 70

12 REFERENCES 72

Bibliography 72

Websites 72

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Excel Sheets 72

CHAPTER-1

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ABSTRACTThere was a time when India was discussed as the land of snake

charmers, black magic and epidemics but the revolutionary Indian growth story

changed everything. Indian economy at its height compelled the world to change

its viewpoint towards India. Out of the several factors which changed the face of

modern India, we are going to discuss the most roaring of them i.e. our share

market. The earlier reform procedures adopted by India gave India the two most

sought after world-class brands i.e. SENSEX and NIFTY. The magical figures

displayed by our market turned all the heads on India. And India became one of the

most favoured places for investment.

We saw the investors getting overjoyed at 21K and we saw them

crying too when it crashed below 10K. We saw how the market rewarded the

undervalued shares and how the overvalued shares fell down to demonstrate the

saying everything which rise more than expected, has to fall.

During the past few years Indian Capital Market has undergone

metamorphic reforms. Every segment of Indian Capital Market viz primary and

secondary markets, derivatives, institutional investment and market intermediation

has experienced impact of these changes. Our market, today, is being recognized as

one of the most transparent, efficient and clean markets. Several techniques

/instruments are used by academicians, policy makers, practitioners and investors

to test the extent of efficiency of the market.

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In the recent past there have been perceptions that volatility in the

market has gone up, Inter and Intra-day volatility. It has been seen that, Indian

stock market provides a very high rate of return and comparatively moderate

volatility. Efficiency of Indian market appear to have improved in the past few

years owing to contraction in settlement cycles, introduction of derivative

products, improvement in corporate governance practices etc,. Stock market

returns exhibit informational efficiency and approximates to normal distribution.

It is very well known that the Indian capital market has witnessed a

major transformation and structural change from the past one decade as a result of

ongoing financial sector reforms.

It is rightly pointed out that improving market efficiency, enhancing

transparency, checking unfair trade practices and bringing the Indian capital

market up to a certain international standard are some of the major objectives of

these reforms. Due to such reforming process, one of the important step taken in

the secondary market is the introduction of derivative products in two major Indian

stock exchanges (viz. NSE and BSE) with a view to provide tools for risk

management to investors and also to improve the informational efficiency of the

cash market.

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CHAPTER-2

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Literature Review

Many studies have been conducted in similar direction, but they are only confined to

a particular time frame while this study validates current market.

Some of the major research works in this regard were:

The Lo & MacKinlay finding of positive autocorrelation was inconsistent with the

negative serial correlation found by Fama & French (1988). Fama & French discovered that for

the U.S. stock market, 40 percent of the variations of longer holding-period returns were

predictable from the information on past returns. Campbell in 1991 used variance decomposition

method for stock returns and concluded that the expected stock return changes through time in a

fairly persistent fashion.

Parameswaran (2000) performed variance ratio tests corrected for bid-ask spread

and nonsynchronous trading on the weekly returns derived from CRSP daily returns file for a

period of 23 years. His results show that eight out of ten size sorted portfolios do not follow a

random walk. He observed that non-trading is not a source of serial correlation in the large sized

firms.

Kim, Nelson & Startz (1991) examined the random walk process of stock prices

by using weekly and monthly returns in five Pacific-Basin stock markets. The findings provided

evidence that the mean reversion was only a phenomenon of the pre-World War II period, and

not a feature of the post-war period. They found that the variance ratio tests produced positive

serial correlation.

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Time-variation in market volatility can often be explained by macroeconomic and

microstructural factors (Schwert 1989a, b). Volatility in national markets is determined by world

factors and part determined by local market effects, assuming that the national markets are

globally linked. It is also consistent that world factors could have an increased influence on

volatility with increased market integration. Bekaert and Harvey (1995) showed this using time-

varying market integration parameter. Research has also shown that capital market liberalisation

policies too, are likely to affect volatility. It would be of interest to policy makers that the

correlation between the two has been found to be positive in the case of some countries. Peter

Buter (1994) noted that stock prices and returns are cyclical, imperfectly predictable in the short

run,and unpredictable in the long run and that they exhibit nonlinear, and possibly chaotic,

behavior related to time-varying positive feedback.

K.S. Chalapati Rao (2002) in his study An Overview of the Indian Stock Market

with Emphasis on Ownership Pattern of Listed Companies suggested that Effective measures

have to be put in place to prevent the managements from abusing their excessively high

shareholding. The promoters should be made personally responsible for omissions and

commissions. Access to the market must be related to genuine need for funds rather than to

benefits flowing from limited public participation. The minimum public offer should be placed

considerably higher than the present 10 per cent.

Andersen et al. (2001a, 2001b), estimates of the realized volatility calculated

using high frequency data are model-free under very weak assumptions. The realized volatility

estimates can be used to test the bias and efficiency of different types of the extreme value

volatility estimators empirically.

Capital markets have shown that positive feedback trading induces negative

return-autocorrelation whose magnitude grows as volatility increases. What is more, positive

feedback trading appears to be associated with the well documented asymmetric behavior of

volatility (Bollerslev 1994)

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Ajay Shah (2006) in his study Indian Stock Market Volatility found that an

efficient market is one which responds to news rapidly. Prices that adjust are of essence to the

efficient functioning of a market economy. The job of financial markets is to hold a mirror up to

the real economy.

CHAPTER-3

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INTRODUCTION

MARKETS DEFINED

STOCK MARKET IN INDIA

The Indian security market has become one of the most dynamic and efficient

security markets in Asia today. The Indian market now conforms to International Standards in

terms of operating efficiency.

During the latter half of 19th century, shares of companies used to be floated in

India occasionally. There were share brokers in Bombay who assisted in the floatation of shares

of companies. A small group of stock brokers in Bombay joined together in 1875 to form an

association called Native Share & Stockbrokers Association. The association drew up codes of

conduct for brokerage business and mobilizes private funds for investment in the corporate

sector. It was this association which later became the Bombay Stock Exchange, Mumbai or BSE.

Later on in 1894 the brokers of Ahmedabad formed the Ahmedabad Stock

Exchange, the second stock exchange of the country. During the 1900s Kolkata became another

major center of share trading and as a result Kolkata Stock Exchange was formed in 1908. Later

on Chennai Stock Exchange was started in 1920. However, by 1923, it ceased to exist. Then the

Madras Stock Exchange was started in 1937. Three more stock exchanges were established

before independence, at Indore in 1930, at Hyderabad in 1943 and at Delhi in 1947.

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Thus along with the increase in number of stock exchanges, the number of listed

companies and the capital of listed companies grown tremendously after 1985 which results into

growth and development of stock market in India.

ABOUT BSE SENSEX

The Stock Exchange, Mumbai; popularly called The Bombay Stock Exchange, or

BSE has the greatest number of listed companies in the world, with 4700 listed as of August

2008. It is located at Dalal Street, Mumbai, India. On 31 December 2007, the equity market

capitalization of the companies listed on the BSE was US$ 1.79 trillion, making it the largest

stock exchange in South Asia and the tenth largest in the world.

The Bombay Stock Exchange was established in 1875. Around 6,000 Indian

companies list on the stock exchange, and it has a significant trading volume. The BSE SENSEX

(Sensitive Index), also called the "BSE 30", is a widely used market index in India and Asia.

Though many other exchanges exist, BSE and the National Stock Exchange of India account for

most of the trading in shares in India.

BSE SENSEX or Bombay Stock Exchange Sensitive Index is a value-weighted

index composed of 30 stocks started in 01 of January, 1986. It consists of the 30 largest and most

actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. These

companies account for around one-fifth of the market capitalization of the BSE. The base value

of the SENSEX is 100 on April 1, 1979, and the base year of BSE-SENSEX is 1978-79.

At irregular intervals, the Bombay Stock Exchange (BSE) authorities review and

modify its composition to make sure it reflects current market conditions. The index is calculatedbased on a free-float capitalization method; a variation of the market cap method. Instead of

using a company's outstanding shares it uses its float, or shares that are readily available for

trading. The free-float method, therefore, does not include restricted stocks, such as those held by

company insiders.

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The index has increased by over ten times from June 1990 to the present. Using

information from April 1979 onwards, the long-run rate of return on the BSE SENSEX works

out to be 18.6% per annum, which translates to roughly 9% per annum after compensating for

inflation. There are five major indices in BSE, thirteen sector specific indices and a BSE Dollex

Index for dollar prices and movements.

Singapore Exchange (SGX) made a strategic investment in Bombay Stock

Exchange, acquiring 5% of its shares for US$42.7 million. It is consistent with the strategy of

building an Asian Gateway for securities and derivatives. BSE is also considering to take part of

the capitalisation of the rising ascension of its partner, Singapore Exchange, which is becoming a

leading financial hub in Asia-Pacific.

ABOUT NSE AND NIFTY 50

The National Stock Exchange of India Limited or S&P CNX NIFTY (NSE), is a

Mumbai-based stock exchange. It is the largest stock exchange in Indiain terms of daily turnover

and number of trades, for both equities and derivative trading. Though a number of other

exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock

exchanges in India, and between them are responsible for the vast majority of share transactions.

The NSE's key index is the S&P CNX Nifty, known as the Nifty, an index of fifty major stocks

weighted by market capitalisation.

The National Stock Exchange of India was promoted by leading Financial

institutions at the behest of the Government of India, and was incorporated in November 1992 as

a tax-paying company. In April 1993, it was recognized as a stock exchange under the Securities

Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market

(WDM) segment in June 1994. The Capital Market (Equities) segment of the NSE commenced

operations in November 1994, while operations in the Derivatives segment commenced in June

2000

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CHAPTER-4

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VOLATILITY

Volatility in simple terms is defined as;

It is a measure of dispersion around the mean or average return of a security. One

way to measure volatility is by using the standard deviation, which tells you how tightly the priceof a stock is grouped around the mean or moving average (MA). When the prices are tightly

bunched together, the standard deviation is small. When the price is spread apart, it will have a

relatively large standard deviation.

Volatility estimation is important for several reasons and for different people in

the market. Pricing of securities is supposed to be dependent on volatility of the market.

A common problem plaguing the low and slow growth of small developing

economies is the swallow financial sector. Financial markets play an important role in the

process of economic growth and development by facilitating savings and channeling funds from

savers to investors. While there have been numerous attempts to develop the financial sector,

small island economies are also facing the problem of high volatility in numerous fronts

including volatility of its financial sector. Volatility may impair the smooth functioning of the

financial system and adversely affect economic performance.

Similarly, stock market volatility also has a number of negative implications.One

of the ways in which it affects the economy is through its effect on consumer.

The impact of stock market volatility on consumer spending is related via the

wealth effect. Increased wealth will drive up consumer spending. However, a fall in stock market

will weaken consumer confidence and thus drive down consumer spending. Stock market

volatility may also affect business investment and economic growth directly. A rise in stock

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market volatility can be interpreted as a rise in risk of equity investment and thus a shift of funds

to less risky assets. This move could lead to a rise in cost of funds to firms and thus new firms

might bear this effect as investors will turn to purchase of stock in larger, well known firms.

While there is a general consensus on what constitutes stock market volatility and,

to a lesser extent, on how to measure it, there is far less agreement on the causes of changes in

stock market volatility. Some economists see the causes of volatility in the arrival of new,

unanticipated information that alters expected returns on a stock. Thus, changes in market

volatility would merely reflect changes in the local or global economic environment. Others

claim that volatility is caused mainly by changes in trading volume, practices or patterns, which

in turn are driven by factors such as modifications in macroeconomic policies, shifts in investor

tolerance of risk and increased uncertainty.

The degree of stock market volatility can help forecasters predict the path of an

economys growth and the structure of volatility can imply that investors now need to hold more

stocks in their portfolio to achieve diversification.

So we can say that the issues of volatility and risk have become increasingly

important in recent times to financial practitioners, market participants, regulators and

researchers.

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Volatility in past shown

through BSE Movements

Sensex milestones

Here is a timeline on the rise of the Sensex through Indian stock market history.

1830's Business on corporate stocks and shares in Bank and Cotton presses started in

Bombay.

1860-1865 Cotton price bubble as a result of the American Civil War

1870 - 90's Sharp increase in share prices of jute industries followed by a boom in tea

stocks and coal

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1978-79 Base year ofSensex, defined to be 100.

1986 Sensex first compiled using a market Capitalization-Weighted methodology for 30

component stocks representing well-established companies across key sectors.

1000, July 25, 1990 - On July 25, 1990, the Sensex touched the four-digit figure for the

first time and closed at 1,001 in the wake of a good monsoon and excellent corporate

results.

July 1991 Rupee devalued by 18-19 %.

2000, January 15, 1992 - On January 15, 1992, the Sensex crossed the 2,000-mark and

closed at 2,020 followed by the liberal economic policy initiatives undertaken by the then

finance minister and current Prime Minister DrManmohan Singh.

3000, February 29, 1992 - On February 29, 1992, the Sensex surged past the 3000 mark

in the wake of the market-friendly Budget announced by Manmohan Singh.

4000, March 30, 1992 - On March 30, 1992, the Sensex crossed the 4,000-mark and

closed at 4,091 on the expectations of a liberal export-import policy. It was then that the

Harshad Mehta scam hit the markets and Sensex witnessed unabated selling.

5000, October 11, 1999 - On October 8, 1999, the Sensex crossed the 5,000-mark as the

Bharatiya Janata Party-led coalition won the majority in the 13th Lok Sabha election.

6000, February 11, 2000 - On February 11, 2000, the information technology boom

helped the Sensex to cross the 6,000-mark and hit and all time high of 6,006.

6151, Feb 14, 2000 Tops. Index declines until Sept 2001 and loses half the value.Coincides with dot-com bubble burst.

2595, Sept 21, 2001 Bottoms.

7000, June 20, 2005 - On June 20, 2005, the news of the settlement between the Ambani

brothers boosted investor sentiments and the scrips ofRIL, Reliance Energy, Reliance

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Capital and IPCL made huge gains. This helped the Sensex crossed 7,000 points for the

first time.

8000, September 8, 2005 - On September 8, 2005, the Bombay Stock Exchange's

benchmark 30-share index the Sensex - crossed the 8000 level following brisk buying

by foreign and domestic funds in early trading.

9000, November 28, 2005- The Sensex on November 28, 2005 crossed the magical

figure of 9000 to touch 9000.32 points during mid-session at the Bombay Stock

Exchange on the back of frantic buying spree by foreign institutional investors and well

supported by local operators as well as retail investors.

9000, December 9, 2005 - The Sensex on November 28, 2005 crossed 9000 to touch

9000.32 points during mid-session at the Bombay Stock Exchange on the back of frantic

buying spree by foreign institutional investors and well supported by local operators as

well as retail investors.

10,000, February 7, 2006 - The Sensex on February 6, 2006 touched 10,003 points

during mid-session. The Sensex finally closed above the 10,000-mark on February 7,

2006.

11,000, March 27, 2006 - The Sensex on March 21, 2006 crossed 11,000 and touched a

peak of 11,001 points during mid-session at the Bombay Stock Exchange for the first

time. However, it was on March 27, 2006 that the Sensex first closed at over 11,000

points.

12,000, April 20, 2006 - The Sensex on April 20, 2006 crossed 12,000 and touched a

peak of 12,004 points during mid-session at the Bombay Stock Exchange for the first

time.

On May 22, 2006, the Sensex plunged by 1100 points during intra-day trading, leading to

the suspension of trading for the first time since May 17, 2004. The volatility of the

Sensex had caused investors to lose Rs 6 lakh crore (US$131 billion) within seven

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trading sessions. The Finance Minister of India, P. Chidambaram, made an unscheduled

press statement when trading was suspended to assure investors that nothing was wrong

with the fundamentals of the economy, and advised retail investors to stay invested.

When trading resumed after the reassurances of the Reserve Bank of India and the

Securities and Exchange Board of India (SEBI), the Sensex managed to move up 700

points, still 450 points in the red.

The Sensex eventually recovered from the volatility, and on October 16, 2006, the Sensex

closed at an all-time high of 12,928.18 with an intra-day high of 12,953.76. This was a

result of increased confidence in the economy and reports that India's manufacturing

sector grew by 11.1% in August 2006.

13,000, October 30, 2006 - The Sensex on October 30, 2006 crossed 13,000 and still

riding high at the Bombay Stock Exchange for the first time. It took 135 days to reach

13,000 from 12,000. And 124 days to reach 13,000 from 12,500. On October 30, 2006 it

touched a peak of 13,039.36 & closed at 13,024.26.

14000, December 5, 2006 - The Sensex on December 5, 2006 crossed 14,000 and

touched a peak of 14028 at 9.58AM (IST) while opening for the day December 5, 2006.

It took 36 days for the Sensex to move from 13,000 to the 14,000 mark.

15,000, July 6, 2007 - The Sensex on July 6, 2007 crossed another milestone and reached

a magic figure of 15,000. it took almost 7 month and 1 day to touch such a historic

milestone. Coincidentally Sachin Tendulkar achieved the same mark (15000 runs in

international cricket) around the same time! (The usual refrain of the time was, "Sachin,

make runs so Sensex rises!")

16,000, September 19, 2007

The Sensex scaled yet another milestone during early morning trade on September 19,

2007. Within minutes after trading began, the Sensex crossed 16,000, rising by 450

points from the previous close. The 30-share Bombay Stock Exchange's sensitive index

took 53 days to reach 16,000 from 15,000. Nifty also touched a new high at 4659, up 113

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points.

The Sensex finally ended with its biggest-ever single day gain of 654 points at 16,323.

The NSE Nifty gained 186 points to close at 4,732.

17,000, September 26, 2007

The Sensex scaled yet another height during early morning trade on September 26, 2007.

Within minutes after trading began, the Sensex crossed the 17,000-mark . Some profit

taking towards the end, saw the index slip into red to 16,887 - down 187 points from the

day's high. The Sensex ended with a gain of 22 points at 16,921.

18,000, October 09, 2007

The BSE Sensex crossed the 18,000-mark on October 09, 2007. It took just 8 days to

cross 18,000 points from the 17,000 mark. The index zoomed to a new all-time intra-day

high of 18,327. It finally gained 789 points to close at an all-time high of 18,280. The

market set several new records including the biggest single day gain of 789 points at

close, as well as the largest intra-day gains of 993 points in absolute term backed by

frenzied buying after the news of the UPA and Left meeting on October 22 put an end tothe worries of an impending election.

19,000, October 15, 2007

The Sensex crossed the 19,000-mark backed by revival of funds-based buying in blue

chip stocks in metal, capital goods and refinery sectors. The index gained the last 1,000 points in

just four trading days. The index touched a fresh all-time intra-day high of 19,096,and finally

ended with a smart gain of 640 points at 19,059.The Nifty gained 242 points to close at 5,670.

20,000, October 29, 2007

The Sensex crossed the 20,000 mark on the back of aggressive buying by funds ahead of the US

Federal Reserve meeting. The index took only 10 trading days to gain 1,000 points after the

index crossed the 19,000-mark on October 15. The major drivers of today's rally were index

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heavyweights Larsen and Toubro, Reliance Industries, ICICI Bank, HDFC Bank and SBI among

others. The 30-share index spurted in the last five minutes of trade to fly-past the crucial level

and scaled a new intra-day peak at 20,024.87 points before ending at its fresh closing high of

19,977.67, a gain of 734.50 points. The NSE Nifty rose to a record high 5,922.50 points before

ending at 5,905.90, showing a hefty gain of 203.60 points.

21000 - January 8, 2008

Effects of the Subprime crisis in the U.S

On July 23, 2007, the Sensex touched a new high of 15,733 points. On July 27, 2007 the

Sensex witnessed a huge correction because of selling by Foreign Institutional Investors

and global cues to come back to 15,160 points by noon. Following global cues and heavy

selling in the international markets, the BSE Sensex fell by 615 points in a single day on

August 1, 2007.

16,000, September 19, 2007 - The Sensex on September 19, 2007 crossed the 16,000

mark and reached a historic peak of 16322 while closing. The 30-share Bombay Stock

Exchange's sensitive index took 53 days to reach 16,000 from 15,000. Nifty also touched

a new high at 4659, up 113 points.

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a new intra-day peak at 20,024.87 points before ending at its fresh closing high of

19,977.67, a gain of 734.50 points. The NSE Nifty rose to a record high 5,922.50 points

before ending at 5,905.90, showing a hefty gain of 203.60 points.

January 2008

The Sensex on January 8, 2008 touched all time peak of 21078 before closing at 20873.

In the third week of January 2008, the Sensex experienced huge falls along with other

markets around the world. On January 21, 2008, the Sensex saw its highest ever loss of

1,408 points at the end of the session. The Sensex recovered to close at 17,605.40 after it

tumbled to the day's low of 16,963.96, on high volatility as investors panicked following

weak global cues amid fears of a recession in the US.

The next day, the BSE Sensex index went into a free fall. The index hit the lower circuit

breaker in barely a minute after the markets opened at 10 AM. Trading was suspended for

an hour. On reopening at 10.55 AM IST, the market saw its biggest intra-day fall when it

hit a low of 15,332, down 2,273 points. However, after reassurance from the Finance

Minister of India, the market bounced back to close at 16,730 with a loss of 875 points.

Over the course of two days, the BSE Sensex in India dropped from 19,013 on Monday

morning to 16,730 by Tuesday evening or a two day fall of 13.9%.15,200, June 13, 2008

The sensex closed below 15,200 mark, Indian market suffer with major downfall from

January 21,2008

14,220, June 25, 2008- The sensex touched an intra day low of 13,731 during the early

trades, then pulled back and ended up at 14,220 amidst a negative sentiment generated on

the Reserve Bank of India hiking CRR by 50 bps. FII outflow continued in this week.

12,822, July 2, 2008 -The sensex hit an intra day low of 12,822.70 on July 2nd, 2008.

This is the lowest that it has ever been in the past year. Six months ago, on January 10th,

2008, the market had hit an all time high of 21206.70. This is a bad time for the Indian

markets, although Reliance and Infosys continue to lead the way with mostly positive

results. Bloomberg lists them as the top two gainers for the Sensex, closely followed by

ICICI Bank and ITC Ltd.

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11801.70, Oct 6, 2008 -The sensex closed at 11801.70 hitting the lowest in the past 2

years. 10527, Oct 10, 2008 The Sensex closed at 10527,800.51 points down from the

previous day having seen an intraday fall of as large as 1063 points. Thus,this week

turned out to be the week with largest percentage fall in the Sensex.

9,975, October 17, 2008 - Sensex crashes below the psychological 5 figure mark of 10K,

following extremely negative global financial indications in US and other countries.

Exactly one year back in October 2007, Sensex had gone past the 20K mark.

8701.07, October 24, 2008 lost 10.96% of its value on the intra day trade, the 3rd

highest loss for a one day period in its history

May 2009

On May 18, 2009, the sensex surged 2110.79 points from the previous closing of

12174.42 this leading to the suspension of trade for the whole day.This event created

history in Dalal Street, by being the first ever time that trade had been suspended for an

increase in value. This rally is primarily due to the victory of the UPA in the 15th General

elections.

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S&P CNX NIFTI PERFORMANCE SINCE

2000

S&P CNX NIFTY PERFORMANC

0

1000

2000

3000

4000

5000

6000

7000

1/3/2000

1/3/2001

1/3/2002

1/3/2003

1/3/2004

1/3/2005

1/3/2006

1/3/2007

1/3/2008

1/3/2009

TIME PERIOD

VALUE

FIG.4.1

BROADER VIEW OF LAST YEAR SENSEX

MOVEMENT

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FIG.4.2

CHAPTER-5

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The Dark Side of Indian Stock

Market

Dot-com Bubble

The "Dot-com Bubble" (or sometimes the "I.T. bubble" was a speculative bubble covering

roughly 19952001, during which stock markets in Western nations saw their value increase

rapidly from growth in the new Internet sector and related fields. The period was marked by the

founding (and, in many cases, spectacular failure) of a group of new Internet-based companies

commonly referred to as Dot-com. A combination of rapidly increasing stock prices, individual

speculation in stocks, and widely available venture capital created an exuberant environment in

which many of these businesses dismissed standard business models, focusing on increasing

market share at the expense of the bottom line.

The growth of the Bubble

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The venture capitalists saw record-setting rises in stock valuations of dot-com companies, and

therefore moved faster and with less caution than usual, choosing to mitigate the risk by starting

many contenders and letting the market decide which would succeed. The low interest rates in

199899 helped increase the start-up capital amounts. Although a number of these new

entrepreneurs had realistic plans and administrative ability, many more of them lacked these

characteristics but were able to sell their ideas to investors because of the novelty of the Dot-com

concept.

A canonical Dot-com company's business model relied on harnessing network effects by

operating at a sustained net loss to build market share (or mind share). These companies

expected that they could build enough brand awareness to charge profitable rates for their

services later. The motto "get big fast" reflected this strategy. During the loss period the

companies relied on venture capital and especially initial public offerings of stock to pay their

expenses. The novelty of these stocks, combined with the difficulty of valuing the companies,

sent many stocks to dizzying heights and made the initial controllers of the company wildly rich

on paper.

Historically, the dot-com boom can be seen as similar to a number of other technology-inspired

booms of the past including railroads in the 1840s, automobiles and radio in the 1920s, transistor

electronics in the 1950s, computer time-sharing in the 1960s, and home computers and

biotechnology in the early 1980s.

Soaring stocks

In financial markets a stock market bubble is a self-perpetuating rise or boom in the share prices

of stocks of a particular industry. The term may be used with certainty only in retrospect whenshare prices have since crashed. A bubble occurs when speculators note the fast increase in value

and decide to buy in anticipation of further rises, rather than because the shares are undervalued.

Typically many companies thus become grossly overvalued. When the bubble "bursts," the share

prices fall dramatically, and many companies go out of business.

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The Dot-com model was inherently flawed: a vast number of companies all had the same

business plan of monopolizing their respective sectors through network effects, and it was clear

that even if the plan was sound, there could only be at most one network-effects winner in each

sector, and therefore that most companies with this business plan would fail. In fact, many

sectors could not support even one company powered entirely by network effects. In spite of this,

however, a few company founders made vast fortunes when their companies were bought out at

an early stage in the dot-com stock market bubble. These early successes made the bubble even

more buoyant. An unprecedented amount of personal investing occurred during the boom, and

the press reported the phenomenon of people quitting their jobs to become full-time day traders.

Harshad Mehta Scam

Harshad Mehta was an Indian stockbroker and is alleged to have engineered the rise in the BSE

stock exchange in the year 1992. Exploiting several loopholes in the banking system, Harshad

and his associates siphoned off funds from inter-bank transactions and bought shares heavily at a

premium across many segments, triggering a rise in the Sensex. When the scheme was exposed,

the banks started demanding the money back, causing the collapse. He was later charged with 72

criminal offenses and more than 600 civil action suits were filed against him. He died in 2002

with many litigations still pending against him.

In April 1992, the Indian stock market crashed, and Harshad Mehta, the person considered the

architect of the Bull Run was blamed for the crash. He had manipulated the Indian banking

systems to siphon off funds from the banking system and used the funds to build large positionsin a select group of stocks. When the scam was exposed, he was called upon by the banks and

financial institutions to return the funds. This necessitated the liquidation of the stock holdings

and an exit from the positions which he had built in various stocks. The selling brought about a

severe market downturn, creating a selling panic, and the stock market crashed within days. He

was arrested on June 5, 1992 for his role in the scam.

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Harshad Mehta had been buying shares heavily since the beginning of 1990. The shares which

attracted attention were those of Associated Cement Companies (ACC). The price of ACC shares

was bid up to Rs 10,000. Mehta justified by the Replacement cost theory which argues that

Old companies should be valued on the basis of the amount of money which would be required

to create another such company.

Through the second half of 1991, Mehta was the darling of the business media and earned the

sobriquet of the Big Bull, who was said to have started the Bull Run. But no body in the market

could figure out the source of money for Mehtas investment.

The crucial mechanism through which the scam was affected was the Ready Forward (RF) deal.

The RF is in essence a secured short-term loan (typically 15-day) from one bank to another.

Crudely put, the bank lends against government securities just as a pawnbroker lends against

jewellery. The borrowing bank actually sells the securities to the lending bank and buys them

back at the end of the period of the loan, typically at a slightly higher price. It was this ready

forward deal that Harshad Mehta and his cronies used with great success to channel money from

the banking system.

A typical ready forward deal involved two banks brought together by a broker in lieu of a

commission. The broker handles neither the cash nor the securities, though that wasnt the case

in the lead-up to the scam. In this settlement process, deliveries of securities and payments were

made through the broker. That is, the seller handed over the securities to the broker, who passed

them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to

the seller. In this settlement process, the buyer and the seller might not even know whom they

had traded with, either being know only to the broker.

This the brokers could manage primarily because by now they had become market makers and

had started trading on their account. To keep up a semblance of legality, they pretended to be

undertaking the transactions on behalf of a bank. Another instrument used in a big way was the

Bank Receipt (BR). In a ready forward deal, securities were not moved back and forth in

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actuality. Instead, the borrower, i.e. the seller of securities, gave the buyer of the securities a BR.

A BR confirms the sale of securities. It acts as a receipt for the money received by the selling

bank. Hence the name - bank receipt. It promises to deliver the securities to the buyer. It also

states that in the mean time, the seller holds the securities in trust of the buyer.

Having figured this out, Mehta needed banks, which could issue fake BRs, or BRs not backed by

any government securities. Two small and little known banks - the Bank of Karad (BOK) and

the Metropolitan Cooperative Bank (MCB) - came in handy for this purpose. These banks were

willing to issue BRs as and when required, for a fee, the authors point out. Once these fake BRs

were issued, they were passed on to other banks and the banks in turn gave money to Mehta,

obviously assuming that they were lending against government securities when this was not

really the case. This money was used to drive up the prices of stocks in the stock market. When

time came to return the money, the shares were sold for a profit and the BR was retired. The

money due to the bank was returned.

The game went on as long as the stock prices kept going up, and no one had a clue about

Mehtas modus operandi. Once the scam was exposed, though, a lot of banks were left holding

BRs which did not have any value - the banking system had been swindled of a whopping Rs

4,000 crore (close to $ 1 billion)

Ketan Parekh Scam

Ketan Parekh was a Mumbai-based stock broker. He hails from a well-to-do Gujarati family

involved in share trading, and Ketan was involved in the shares scam of 2000-2001 on the Indian

Stock Market.

Companies, when raising money from the stock market, rope in brokers to back them in raising

the share price. Ketan formed a network of brokers from smaller exchanges like the Allahabad

Stock Exchange and the Calcutta Stock Exchange, and used benami, or share purchases, in the

name of poor people living in the shanty towns of Mumbai. Ketan rose to fame at the same time

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as the worldwide dot-com boom (1999-2000) and he relied primarily on the shares of ten

companies for his dealings (now known infamously as the K-10 scrips).

Ketan had large borrowings from Global Trust Bank, whose shares he was ramping up so that he

could get a good deal at the time of its merger with UTI Bank. He got an Rs 250 crore loan from

Global Trust Bank; although Global Trusts chairman Ramesh Gelli, who was later asked to

resign, repeatedly asserted that the amount was less than Rs 100 crore, which was in keeping

with the Reserve Bank of India's normal amount. Ketan and his associates obtained another Rs

1,000 crore from the Madhavpura Mercantile Co-operative Bank despite the fact that RBI

regulations ruled that the maximum loan a broker could obtain was Rs 15 crore. In addition, Mr

Mehta's was involved with Ketan's Business in 1996.

Ketan's modus operandi was to ramp up the shares of select firms in collusion with promoters.

Interestingly, around the time when Ketan started taking long positions in his favorite K-10

scrips, the Securities and Exchange Board of India (SEBI) concluded a 3-year old case against

Harshad Mehta, who had colluded with the managements of BPL, Sterlite and Videocon to ramp

up their shares.

In Ketan's case, SEBI found prima facie evidence of price rigging in the scrips of Global Trust

Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.

The stock market crash of 2008

On September 16, failures of large financial institutions in the United States, due primarily to

exposure to securities of packaged subprime loans and credit default swaps issued to insure these

loans and their issuers, rapidly evolved into a global crisis resulting in a number of bank failuresin Europe and sharp reductions in the value of equities (stock) and commodities worldwide. The

failure of banks in Iceland resulted in a devaluation of the Icelandic Krona and threatened the

country with bankruptcy. Iceland was able to secure an emergency loan from the IMF in

November. In the United States, 15 banks failed in 2008, while several others were rescued

through government intervention or acquisitions by other banks. On October 11, 2008, the head

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of the International Monetary Fund (IMF) warned that the world financial system was teetering

on the "brink of systemic meltdown".

FIG.5.1

The economic crisis caused countries to temporarily close their markets.

On October 8, the Indonesian stock market halted trading after a 10% one day drop.

The Times of London reported that "the meltdown was being dubbed the Crash of 2008 and

older traders were comparing it with Black Monday in 1987. The fall this week of 21 percent

was not as bad as the 28.3 percent fall 21 years ago. But some traders were saying it was worse.

At least then it was a short, sharp, shock on one day. This has been relentless all week.

Business Week also referred to the crisis as a "stock market crash" or the "Panic of 2008."

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The Black Week: Beginning October 6th and lasting all week the Dow Jones Industrial Average

closed lower 5 out of 5 sessions. Volume levels were also record breaking. The Dow Jones

industrial average fell over 1,874 points, or 18%, in its worst weekly decline ever on both a point

and percentage basis. The S&P 500 fell more than 20%. The week also set 3 top ten NYSE

Group Volume Records with October 8th at #5, October 9th at #10, and October 10th.

It has been noted that recent daily stock market drops are overall nowhere near the severity

experienced during the last stock market crash in 1987. Others have suggested that the media is

manipulating and over-inflating stock market drops and calling them "crashes" in order to create

the perception of a great depression.

On October 24, many of the world's stock exchanges experienced the worst declines in their

history, with drops of around 10% in most indices. In the US, the Dow Jones industrial average

fell 3.6%, not falling as much as other markets. Instead, both the US Dollar and Japanese Yen

soared against other major currencies, particularly the British Pound and Canadian Dollar, as

world investors sought safe havens. Later that day, the deputy governor of the Bank of England,

Charles Bean, suggested that "This is a once in a lifetime crisis, and possibly the largest financial

crisis of its kind in human history."

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CHAPTER-6

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Stock Market Cycle

Cycles are prevalent in all aspects of life. They range from the very short term,

like the life cycle of a June bug, which lives only a few days, to the life cycle of a planet, which

takes billions of years.

No matter what market you are referring to, all have similar characteristics and go

through the same phases. All markets are cyclical. They go up, peak, go down and then bottom.

When one cycle is finished, the next begins.

The problem is that most investors and traders either fail to recognize that markets

are cyclical or forget to expect the end of the current market phase. Another significant challenge

is that, even when you accept the existence of cycles, it is nearly impossible to pick the top or

bottom of one. But an understanding of cycles is essential if you want to maximize investment or

trading returns. Here are the four major components of a market cycle and how you can

recognize them:

The Four Phases of an Investment Cycle

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FIG.6.1

1. Accumulation Phase

This phase occurs after the market has bottomed and the innovators (corporate

insiders and a few value investors) and early adopters (smart money managers and experienced

traders) begin to buy, figuring that the worst is over. Valuations are very attractive. General

market sentiment is still bearish. Articles in the media preach doom and gloom, and those who

were long through the worst of the bear market have recently capitulated, that is, given up and

sold the rest of their holdings in disgust. But in the accumulation phase, prices have flattened and

for every seller throwing in the towel, someone is there to pick it up at a healthy discount.

Overall market sentiment begins to switch from negative to neutral.

2. Mark-Up Phase

At this stage, the market has been stable for a while and is beginning to move

higher. The early majority are getting on the bandwagon. This group includes technicians who,

seeing that the market is putting in higher lows and higher highs, recognize that market direction

and sentiment have changed. Media stories begin to discuss the possibility that the worst is over,

but unemployment continues to rise, as do reports of layoffs in many sectors. As this phasematures, more investors jump on the bandwagon as fear of being in the market is supplanted by

greed and the fear of being left out.

As this phase begins to come to an end, the late majority jump in and market

volumes begin to increase substantially. At this point, the greater fool theory prevails. Valuations

climb well beyond historic norms, and logic and reason take a back seat to greed. While the late

majority are getting in, the smart money and insiders are unloading. But as prices begin to level

off, or as the rise slows down, those laggards who have been sitting on the sidelines see this as a

buying opportunity and jump in en masse. Prices make one last parabolic move, known in

technical analysis as a selling climax, when the largest gains in the shortest periods often occur.

But the cycle is nearing the top of the bubble. Sentiment moves from neutral to bullish to

downright euphoric during this phase.

3. Distribution Phase

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In the third phase of the market cycle, sellers begin to dominate. This part of the

cycle is identified by a period in which the bullish sentiment of the previous phase turns into a

mixed sentiment. Prices can often stay locked in a trading range that can last a few weeks or

even months. For example, when the Dow Jones Industrial Average peaked in Jan 2000, it traded

down to the vicinity of its prior peak and stayed there over a period of more than 18 months. But

the distribution phase can come and go quickly: for the Nasdaq Composite, the distribution phase

was less than a month long, as it peaked in Mar 2000 and then retreated quickly. When this phase

is over, the market reverses direction. Classic patterns like double and triple tops, as well as head

and shoulders top patterns, are examples of movements that occur during the distribution phase.

The distribution phase is a very emotional time for the markets, as investors are

gripped by periods of complete fear, interspersed with hope and even greed as the market may at

times appear to be taking off again. Valuations are extreme in many issues and value investors

have long been sitting on the sidelines. Sentiment slowly but surely begins to change, but this

transition can happen quickly if accelerated by a strongly negative geopolitical event or

extremely bad economic news. Those who are unable to sell for a profit settle for a breakeven or

a small loss.

4. Mark-Down PhaseThe fourth and final phase in the cycle is the most painful for those who still hold

positions. Many hang on because their investment has fallen below what they paid for it,

behaving like the pirate who falls overboard clutching a bar of gold, refusing to let go in the vain

hope of being rescued. It is only when the market has plunged 50% or more that the laggards,

many of whom bought during the distribution or early mark-down phase, give up or capitulate.

Unfortunately, this is a buy signal for early innovators and a sign that a bottom is imminent. But

alas, it is new investors who will buy the depreciated investment during the next accumulation

phase and enjoy the next mark-up.

Timing

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A cycle can last anywhere from a few weeks to a number of years, depending on

the market in question and the time horizon you are looking at. A day trader using five-minute

bars may see four or more complete cycles per day.

The Presidential Cycle

One of the best examples of the cycle phenomenon is the effect of the four-year

presidential cycle on the stock market, real estate, bonds and commodities. The theory about this

cycle states that economic sacrifices are generally made during the first two years of a

presidents mandate. As the election draws nearer, administrations have a habit of doing

everything they can to stimulate the economy so that voters go to the polls with jobs and a

feeling of economic well being.

Interest rates are generally lower in the year of an election, so experienced

mortgage brokers and real estate agents often advise clients to schedule mortgages to come due

just prior to an election. This strategy has worked quite well during the last 16 years. The stock

market has also benefited from increased spending and decreased interest rates leading up to an

election, as was certainly the case in the 1996 and 2000 elections. Presidents know that if voters

are not happy about the economy when they go to the polls, chances for re-election are slim to

none, as George Bush Sr. learned the hard way in 1992.

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CHAPTER-7

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Research Objectives

Identifying Entry level or the Over sold zone in the

Indian Stock Market based on Market P/E Ratio.

Identifying Exit level or the Over bought zone in the

Indian Stock Market based on Market P/E Ratio.

Analyzing Current Market Trends using Oscillator

Analysis.

Identifying sectors to be bought at the entry levels

which are expected to perform in the next Bull Run.

Research Methodology

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Sample Size

Past Nine Years Price Earning Ratios of S&P CNX Nifty was taken starting from 01-01-

2000 to 31-12-2009.

Data Collection and Analysis

For the research purpose as per the topic requirements the Secondary Data was taken from

national stock exchanges (NSE) website.

Research Approach

The research approach adopted in this project was Plotting of Market Price Earning Ratios over

Normal Probability Graph and plotting of Relative Strength Index to find the Entry & Exit

Levels in Indian Stock Market.

Price Earning RatioPrice Earning Ratio

The P/E ratio or price-to-earnings ratio is a measure of the price paid for a share relative to the

annual income or profit earned by the firm per share. It is a financial ratio used for valuation: a

higher P/E ratio means that investors are paying more for each unit of income, so the stock is

more expensive compared to one with lower P/E ratio.

P/E Ratio = Market Value per Share

Earnings per Share (EPS)

The P/E ratio is the current stock price of a company divided by its earnings per share (EPS).

Variations exist using trailing EPS, forward EPS, or an average of the two.

Historically, the average P/E ratio in the market has been around 15-25.

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A variation that is often used is to exclude companies with negative earnings from the sample -

especially when looking at sub-indices with a lower number of stocks where companies with

negative earnings will distort the figures.

Normal Distribution

A probability distribution that plots all of its values in a symmetrical fashion and most of the

results are situated around the probability's mean. Values are equally likely to plot either above

or below the mean. Grouping takes place at values that are close to the mean and then tails off

symmetrically away from the mean.

It is also known as a "Gaussian distribution" or "bell curve"

The normal distribution is the most common type of distribution, and is often found in stock

market analysis. Given enough observations within a sample size, it is reasonable to make the

assumption that returns follow a normally distributed pattern, but this assumption can be

disproved.

As with any distribution, the distributions mean, skewness and kurtosis coefficients should be

calculated in order to determine the type of distribution you may be dealing with.

The normal distribution is used to characterize a series of returns. The distribution is centered at

the mean and its width is determined by the standard deviation (volatility).

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FIG.7.1

S&P CNX Nifty

S&P CNX Nifty is a well diversified 50 stock index accounting for 22 sectors of the economy. It

is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives

and index funds.

S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which

is a joint venture between NSE and CRISIL. IISL is India's first specialized company focused

upon the index as a core product. IISL has Marketing and licensing agreement with Standard &

Poor's (S&P), who are world leaders in index services.

The average total traded value for the last six months of all Nifty stocks is approximately 62.45%of the traded value of all stocks on the NSE.

Nifty stocks represent about 63.98% of the total market capitalization as on Jan. 30, 2009.

Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2 crore is 0.16%

S&P CNX Nifty is professionally maintained and is ideal for derivatives trading.

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Oversold Zone

A condition in which the price of an underlying asset has fallen sharply, and to a level below

which its true value resides. This condition is usually a result of market overreaction or panic

selling.

A situation in technical analysis where the price of an asset has fallen to such a degree - usually

on high volume - that an oscillator has reached a lower bound. This is generally interpreted as a

sign that the price of the asset is becoming undervalued and may represent a buying opportunity

for investors.

Assets that have experienced sharp declines over a brief period of time are often deemed to be

oversold. Determining the degree to which an asset is oversold is very subjective and could

easily differ between investors. Identifying areas where the price of an underlying asset has been

unjustifiably pushed to extremely low levels is the main goal of many technical indicators such

as the relative strength index, the stochastic oscillator, the moving average convergence

divergence and the money flow index.

Overbought Zone

A situation in which the demand for a certain asset unjustifiably pushes the price of an

underlying asset to levels that do not support the fundamentals.

In technical analysis, this term describes a situation in which the price of a security has risen to

such a degree - usually on high volume - that an oscillator has reached its upper bound. This is

generally interpreted as a sign that the price of the asset is becoming overvalued and may

experience a pullback.

An asset that has experienced sharp upward movements over a very short period of time is often

deemed to be overbought. Determining the degree in which an asset is overbought is very

subjective and can differ between investors. Technicians use indicators such as the relative

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strength index, the stochastic oscillator or the money flow index to identify securities that are

becoming overbought.

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CHAPTER-8

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AnalysisCalculation using 20% Probability for Oversold & Overbought Zone

Over Sold Zone

Mean Value (X) = 17.79

Standard Deviations ( ) = 3.67

-.84 = - 17.79

3.67

= 14.7072

Over Bought Zone



.84 = - 17.79

3.67

= 20.8728

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Plotting of P/E Ratios on Normal Probability Graph keeping 20% Probability.

14.7072 17.79 20.8728

FIG.8.1

In the above Figure it is clearly seen that at 20% Probability the oversold zone or entry level is

identified at 14.7072. When P/E of the Nifty is at the level of 14.7072 investors should start there

buying.

Similarly when the market P/E exceeds the calculated level of 20.8728 investors should start

selling there securities purchased, because the market will fall in the near future.

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Calculation keeping 10% Probability for Oversold & Overbought Zone

Over Sold Zone



-.1.28 = - 17.79

3.67

= 13.0924

Over Bought Zone



1.28 = - 17.79

3.67

= 22.4876

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Plotting of P/E Ratios on Normal Probability Graph keeping 10% Probability.

13.0924 17.79 22.4876

FIG.8.2

Here in this situation it is seen that when the market Price Earning Ratio reaches the level of

13.0924, an investor should invest all his savings because at the maximum stretch markets will

go down by 10%. So he should invest at this level and stay invested.

When the market P/E reaches the upper price earning limit of 22.4876 the investor should

immediately take exit from the market because to the maximum markets will go up by 10% or

less then they will start falling.

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MARKET P/E RETURNS

PLOTTING SINCE 2000

MARKET P/ E RETU

0

5

10

15

20

25

30

3-Jan-00

15-Sep-00

30-May-01

12-Feb-02

25-Oct-02

10-Jul-03

23-Mar-04

1-Dec-04

11-Aug-05

2-May-06

9-Jan-07

24-Sep-07

10-Jun-08

27-Feb-09

19-Nov-09

TIME PERI

P/EV

ALUE

FIG.8.3

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P/E RETURNS OF BSE

OVER THE LAST YEAR

SECTOR WISE

FIG.8.4

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RSI Graph of S&P CNX Nifty

FIG.8.5

In the above Graph as we can see that there has been very much fluctuations in the past year

owing to the Global Financial Crisis. Many times the index had touched the entry level or the

oversold level, from where the investor enters into the market.

Ideally an investor, in order to maximize their returns should enter into oversold zone i.e. the 20

level which was touched many times in the past year and exit when the returns reach to

overbought zone that is around 80 after which the market is expected to fall.

Seeing the above condition, the markets are having range bound movements in past few months,

the investor may enter at this stage as the returns are showing strength at its average line of 50.

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Dow Theory

Dow Theory is a heterodox theory on stock price movements that is used as the basis for

technical analysis. The theory was derived from 255 Wall Street Journal editorials written by

Charles H. Dow (18511902), journalist, founder and first editor of the Wall Street Journal and

co-founder ofDow Jones and Company. Following Dow's death, William P. Hamilton, Robert

Rhea and E. George Schaefer organized and collectively represented "Dow Theory," based on

Dow's editorials. Dow himself never used the term "Dow Theory," nor presented it as a trading

system.

The six basic tenets of Dow Theory as summarized by Hamilton, Rhea, and Schaefer are

described below.

1. The market has three movements

(1) The "main movement", primary movement or major trend may last from less than a

year to several years. It can be bullish or bearish. (2) The "medium swing", secondary

reaction or intermediate reaction may last from ten days to three months and generally

retraces from 33% to 66% of the primary price change since the previous medium swing

or start of the main movement. (3) The "short swing" or minor movement varies with

opinion from hours to a month or more. The three movements may be simultaneous, for

instance, a daily minor movement in a bearish secondary reaction in a bullish primary

movement.

2. Trends have three phases

Dow Theory asserts that major market trends are composed of three phases: an

accumulation phase, a public participation phase, and a distribution phase. The

accumulation phase (phase 1) is a period when investors "in the know" are actively

buying (selling) stock against the general opinion of the market. During this phase, the

stock price does not change much because these investors are in the minority absorbing

(releasing) stock that the market at large is supplying (demanding). Eventually, the

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http://en.wikipedia.org/wiki/Heterodox_economicshttp://en.wikipedia.org/wiki/Technical_analysishttp://en.wikipedia.org/wiki/Wall_Street_Journalhttp://en.wikipedia.org/wiki/Wall_Street_Journalhttp://en.wikipedia.org/wiki/Charles_H._Dowhttp://en.wikipedia.org/wiki/Journalisthttp://en.wikipedia.org/wiki/Wall_Street_Journalhttp://en.wikipedia.org/wiki/Dow_Jones_and_Companyhttp://en.wikipedia.org/wiki/Heterodox_economicshttp://en.wikipedia.org/wiki/Technical_analysishttp://en.wikipedia.org/wiki/Wall_Street_Journalhttp://en.wikipedia.org/wiki/Charles_H._Dowhttp://en.wikipedia.org/wiki/Journalisthttp://en.wikipedia.org/wiki/Wall_Street_Journalhttp://en.wikipedia.org/wiki/Dow_Jones_and_Company


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Dow believed that volume confirmed price trends. When prices move on low volume,

there could be many different explanations why. An overly aggressive seller could be

present for example. But when price movements are accompanied by high volume, Dow

believed this represented the "true" market view. If many participants are active in a

particular security, and the price moves significantly in one direction, Dow maintained

that this was the direction in which the market anticipated continued movement. To him,

it was a signal that a trend is developing.

6. Trends exist until definitive signals prove that they have ended

Dow believed that trends existed despite "market noise". Markets might temporarily

move in the direction opposite to the trend, but they will soon resume the prior move. Thetrend should be given the benefit of the doubt during these reversals. Determining

whether a reversal is the start of a new trend or a temporary movement in the current

trend is not easy. Dow Theorists often disagree in this determination. Technical analysis

tools attempt to clarify this but they can be interpreted differently by different investors.

The Dow Theory states that if the demand in Manufacturing & Transportation Industry comes

down then the overall economy will come into slowdown.

However, in the latest approaches Transportation industry has been replaced by Capital Goods

Industry.

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CHAPTER-9

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Findings & Recommendations

Stock Markets usually operate in Four Stages.

An Investor at 20 % probability should start entering when Market P/E Ratio

reaches a level of 14.7072.

At 20% probability, an investor should take exit when market P/E Ratio reaches

20.8728.

Investors should invest all there savings when the market P/E Ratio reaches

13.0924as scripts may fall to the maximum of 10% from that level.

The Ideal time for investors to exit at 10% probabilistic level is 22.4876as from

there the bubble may burst anytime.

Market P/Es have touched the lowest level only two since last nine years.

The Oscillator Analysis of Relative Strength Index also shows Strength at the

current levels, meaning the investors can enter at this level.

Shares of Manufacturing & Capital Goods Industries can be bought for the next

Bull Run, as per Dow Theory.

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CHAPTER-

10

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Conclusion

The last 15 years of the Indian securities market can be considered as the most

important part of the history where the market gone through the post liberalization era of Indianeconomy and witnessed the formation of Securities and Exchange Board of India (SEBI) which

brought substantial transparency in share market practices and thus managed to bring in trust of

not only domestic investors but also the international ones.

Understanding stock market risk and return behavior is important for investors.

The degree of volatility presence in the stock market would lead investors to demand a higher

risk premium, creating higher cost of capital, which impedes investment and slows economic

development.

Stock market crash is a sudden dramatic decline of stock prices across a

significant cross-section of a stock market. Crashes are driven by panic as much as by underlying

economic factors. They often follow speculative stock market bubbles.

Stock market crashes are in fact social phenomena where external economic

events combine with crowd behavior and psychology in a positive feedback loop where selling

by some market participants drives more market participants to sell. Generally speaking, crashes

usually occur under the following conditions, a prolonged period of rising stock prices and

excessive economic optimism, a market where Price to Earnings ratios exceed long-term

averages, and extensive use of margin debt and leverage by market participants.

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The analysis of the stock market cycles shows that in general

over the reference period the bull phases are longer, the amplitude of bull

phases is higher and the volatility in bull phases is also higher.

The gains during expansions are larger than the losses during

the bear phases of the stock market cycles. The bull phase in comparison

with its pre liberalization character is more stable in the post liberalization

phase. The results of our analysis also show that the stock market cycles

have dampened in the recent past. Volatility has declined in the post

liberalization phase for both the bull and bear phase of the stock market

cycle.

Timing Investors to enter at market bottoms and exit at tops will

always involve risk, no matter which way they slice it. But techniques Like

RSI, outside revers

project on safety zone for investor

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