Will Nifty correct from here? India bull-bear index at 15-year high, says CLSA

CLSA highlights the Proprietary India bull-bear index at 15-year high bullish sentiment. CLSA introduces the proprietary India bull-bear index, which uses about 20 indicators to quantify various aspects of investor sentiment. Backtesting shows high accuracy in signalling all key market tops and bottoms in the last 15 years. The index hit a 15-year high a few days ago, suggesting peak bullish sentiment. This coinciding with peak valuation of Nifty on trailing and forward multiples as well as happening during the Jan-Mar quarter, which has seen half of the key market tops in the last 30 years, make CLSA worry if we are nearing an important peak on Nifty.

Nifty is already at record trailing and forward PE multiples but many investors argue that current easy liquidity and depressed interest rates make historical valuation benchmarks less relevant. To compare the current market to history from an investor sentiment perspective, we introduce our proprietary India bull-bear index. To quantify investor sentiment, the index uses about 20 indicators to measure factors such as absolute and relative valuations, volatility, market breadth, leverage positioning, retail participation, flows, easy liquidity, trend strength, and extent of momentum.

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CLSA’s sentiment index would have pinpointed one-third of the 12 market tops in the last 15 years. For another third of these peaks, the index would have given an early warning within a month before the final market top; investors would have missed only the last 1-9% of returns. For three of the remaining four instances, the warning came 8-11 weeks before the final peak; investors would have missed the last 5-9%.

The worst performance would have been in 2015, when investors would have missed 12% return, as the sentiment index peaked nearly six months before the market peak. Backtesting shows even better accuracy in predicting market lows, it would have pinpointed two-thirds of the 12 bottoms. In another three instances, investors would have missed only 1-5% of the initial rally from the lows. The index would have missed the Oct-08 low in India by only six days but this would imply missing the first 12% move.

The India bull-bear index recorded a 15-year high bull sentiment reading a few days ago. This makes us worry whether we are at a point of peak bullish investor sentiment along with record valuation. Such expectations could be a recipe for important market tops.

CLSA noted an interesting seasonality, half of the 18 important market tops in the last 30 years have occurred in the Jan-Mar quarter, within weeks of the Indian budget as well as during the early part of the year when investors review portfolios. This seasonality adds another risk at this point of peak valuation + peak bull sentiment.