Signals to buy low and sell high

In an article for Business Standard, Devangshu Datta highlights key financial indicators for stock investors to watch: Index growth rate, Dividend Yield, Price-to-Earnings and Price-to-Book Value.

The average PE of the Sensex has been about 17 since 1996. The market has rarely been able to sustain PEs ranging beyond 20 and it has rarely seen dips below the 13 PE levels. Single-digit PEs have been rare. Every time the market has dropped below 13 PE, it has been a good buy. It's trading at around 12 PE now.

Similar number-crunching with respect to price book value leads to the conclusion that the market is a good buy whenever the PBV is below 2.5. It's hovering around 2.5 levels right now. Similarly, a dividend yield of over 1.5 per cent is usually a reliable buy signal. The current yield is at 1.9 per cent.

...Another interesting thing is that it is equally easy to build a set of sell signals from this basic data. You get a sell signal if the CAGR is over 19 per cent. You get a sell signal if the dividend yield is below 1 per cent. You get a sell signal if the PE ratio is over 20. You get a sell signal if the PBV is over 4.5. In combination, these sell signals have been correct an overwhelming majority of the time.