I may think that the market is overheated.

Does it matter?

Who cares for what I think?

Market runs on flow of money. If more money chases few stocks, prices tend to go up. The money chases one group of stocks at one time, then goes for another group.

We see IT stocks soaring high one day while banks are going down. Next day, the roles get reversed.

Well, let us talk about the heat.

My readers know me for my short trades and PUT buying trades. That probably makes me bearish about the market.

My preferences notwithstanding, I do not think that he market is overheated at this point of time.

Let us have a look at NIFTY P/E (Price to Earnings) ratio:

It was 26.25 on August 31, 2021.

This is not too high a number.

An year ago, P/E ratio was much higher:

It was 32.29.

What does it mean?:

While the NIFTY index has gained 51% over last 365 days, the P/E ratio has significantly moved lower.

That implies that market is fairly priced now than it was one year ago.

This maybe difficult to believe, but if the numbers are right, that is the fact. And there is no cause to not trust the numbers.

We can be wrong:

Readers will agree that there is no one with more access to economy data than the RBI governor.

With all that data available to him and considering the fact that NIFTY was trading at a very high P/E, he predicted a big correction in the market last year.

We all know what has happened since then.

RBI governor got it absolutely wrong.

Now we see NIFTY much higher and P/E much lower.

How could that happen?

Because of improvement in earnings.

And improvement in earnings is a good sign. Market is poised for greater heights. Only we can not predict it over short term.

We may see some correction in the immediate future. Or may not, who knows?

Overheated or not:

Having stated earlier that the market is not overheated, I would like to add few words of caution here.

With markets at all time high, the beaten down stocks suddenly make big up moves. New investors think that the stock is now on road to recovery. In fact, it is nothing of the sort. Soon, these stocks will get back to lower levels.

Avoid these stocks. They may look cheap but they do not have value.

Some examples are Yes Bank, Idea, India Bulls Housing Finance, Reliance Capital, Reliance Power, PCJ. Suzlon, Jaiprakash Associates and almost all of PSU banks.

About the heat and the market, we have to learn to live with it.

My earlier answers on the subject:

History has shown that the market always crashes when the NIFTY PE is greater than 28. Why are people investing in the stock market when the current PE is around 32?

Do you agree with the RBI Governor, Shantikanta Das, that a heavy correction is awaiting the Indian stock markets?

Published on Quora.