The Indian Stock markets have been rising steadily as the global 'stock market ' recovery continues.
Since markets hit their panic lows in March this year (yes, we can say so now, with the benefit of hindsight!!!!), the rally has been spectacular.
The world economy may not have recovered, but markets have clearly run ahead of themselves.
Below is some P/E ratio data from a recent article in the Business Standard newspaper (Thurs 29, September 2009).
Source: Current market valuations leave little scope for profit-making
It's worth remembering that markets usually overshoot both on the upside and the downside.
A quick glance at some sector P/E Ratios, and you could well think that we are back to the days of an invincible bull market.
P/E Ratios in the 25-30 x range leave no scope for disappointment.
If you exclude commodity sectors like cement and non-ferrous metals, the average P/E is even more expensive.
Risks to the economy still remain:
The monsoons this year have been rather unsatisfactory.
As stimulus packages are gradually withdrawn, sectors like autos and textiles could face head winds.
A global rally built on foundations of '''ginormous''' government money printing, stimulus packages, bailout packages and debt -----> can last longer than some bears can stay solvent.
...and when bears start to reluctantly convert to the bullish camp, it's time to take a step back and analyse your investment profile.
While you don't want to miss out on the party, it's probably more advisable to sell into the strength than buy anything now.
The risk -reward ratio is clearly not in favour of the long only investor.