State of the Market|Reading the Psychology of the market

Bajaj Auto is one stock that seems still worth riding; and here’s why.

Bajaj Auto = Exhibiting Strength

Nifty has broken 50 dma conclusively but Bajaj Auto is still trading above 50 dma. This means out performance. The best thing - the stock has pulled back at a very slow pace and on very low volumes. See the chart below…

Source: ChartAlert [www.chartalert.com]

Technically, as in the past, even if Nifty corrects, there is probability that stock may turn sideways just around 50 dma and not decline much from current levels. WHY?

Because fundamentals matter especially when earnings momentum is visible and strong

Fundamentals on upswing

Two wheeler industry is the real play on complete India story. Historically, it has been seen that two wheelers always lead the market in early stages of economic recovery. It begins with - trough valuations, earnings suprise, earnings momentum and then PE expansion.

Good news: The two wheeler stocks are still trading at reasonable valuations and have yet to witness PE expansion. It means froth has not build up. As per few estimates, Bajaj Auto is expected to post an EPS of Rs. 98 in FY11. It means stock is trading at 14 times FY11 earnings…quite reasonable considering growth momentum.

Assumption - Earnings momentum might hold the current PE multiple (during correction) and this may help the stock to hold 50 dma.

As always, please note the above stocks are not trading recommendations.

Disclaimer - The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers