This article was put on theindianstocks com on 5th Jan
echnical View %u2013 2008
Of fat tails and extreme value theories%u2026.
CMP BSE 20300
BEST CASE 22800 FAIR VALUE 14864 BEAR CASE 11200
Following the stellar rally of 2007 , the Indian markets have entered bubble zone and the best case scenario is indicative of a 10-12% % upside from current market levels for the year which will see an above fair value level of approx 21622/ 22800 for the BSE At that level consensus earnings will be approximately 27 times anticipated FY 2008/9 EPS of Rs 850 for India Inc. The upside is with the caveat that that the US undergoes a soft landing , the falling dollar receives aggressive Fed stimulus, emerging markets continue to assert themselves and India%u2019s growth and relative valuations remain in good shape.
The bear case indicates a 25 % downside from current levels over the next 12 months with first support at 14,864 and that becomes reality if the US recession is deep, and is combined with significant policy changes at home and a hostile political environment. Extrapolating the fair value estimate of 17 times anticipated FY2008/9 EPS , the fair value of the Sensex works out to approximately 14450 / 14,864 which is also the inflection point from where Elliots 5th wave extension for 2007 began.
Should the US recession deepen significantly and /or a major financial crisis occur in global markets causing
