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Nifty eyes 12000 mark in 2018

IIFL Derivative Desk | Delhi | December 21, 2017 14:45 IST

The
Sensex is
up
28.39%
so far in
the
calendar
year
2017,
while the
Nifty is
up
29.22%.
Now the
question is; what could be the target or return percentage
expectation for 2018? To ascertain that there are two formulas,
which are as follows:

1. Bogle’s formula:

Future Market Returns = Dividend Yield (last 5 years) + Earnings


Growth CAGR (last 5 years) +/- Change in P/E Ratio (last 5
years).

A. The dividend yield has usually been in the range of 0.93-


1.66%. A conservative estimate takes the yield as 1.34%.
B. The Nifty's EPS has grown from Rs316 in December 2012, to
Rs391 now. So, five year CAGR is 4%.
C. Currently, the Nifty PE is at 26.75 and it was at around PE
18.50 in December 2012. So, it is up by about PE 8.25 in the last
5years.

Using the formula, the expectations for future index returns


would be (1.34 + 4 + 8.25), which is about 13.59%. As on
December 20, 2017, Nifty is around at 10,450, which means as
per future market return formula, Nifty could be 11,800-11,900
levels by December 2018.

2. Mean+1 Formula:

The returns from the index over short periods of time can be said
to be Normally Distribution (ND) and ND is defined by mean and
standard deviation with a bell-shaped curve.

The Formula is:

Spot price + (IV range * Reversal level)


10,450 + (1357*0.786) = 11,517
So, as per Mean+1 formula, Nifty could be 11,500-11,600 levels
by December 2018.

Remarks:

For Nifty to achieve the target of 11,500-12,000, the best


derivative strategy is 'Synthetic Call' with LEAP option. Traders
and investors are advised to do these complex options strategy
after knowing their risk management through a derivative expert
only. Hedging any open positions against adverse market
movements is the key aspect of risk management in derivatives.