Historically, the P/E of 25 has proved to be a jinx for CNX Midcap. The index is again hovering about that level
05-Oct-2015 •Mohammed Ekramul Haque
Two times earlier the CNX Midcap index crossed the price-to-earnings valuation of 25 in the last decade. In both the cases, index valuations plummeted soon after.
The most recent of such a fall was during the financial crash of 2008. On January 7, 2008, the CNX Midcap index saw peak valuations of 26.3 times earnings. More than ten months after the markets crashed, the index valuations settled down at a low of 7.1 times on October 24, 2008. That was a fall of around 73 per cent in index P/E valuations. During this time, the CNX Midcap index saw a fall of 65 per cent.
The market crash before the one in 2008 was in May 2006. Rising interest rates and a fall in metals and commodity prices brought about a global meltdown. This fall that bottomed in the following month saw the P/E of the Midcap index crash from 25.8 to 14.3 - a fall of 44 per cent in P/E valuations. The Midcap index fell by 37 per cent during this period.
In the beginning of August this year, the Midcap index had again breached the 25-times-earnings mark, peaking at a valuation of 25.9 times on August 11, 2015. On Monday, August 24, the markets crashed, taking the P/E of the Midcap index to a low of 22.2 times - a fall of 14.2 per cent - before quickly rebounding. The index had fallen 11 per cent at its low.
Today, the Midcap index trades at a valuation of 25.75 times (as of October 1, 2015). It is still dangerously above the 25 P/E mark. This begs the question: Given that previous breaches above 25 have resulted in sharp declines, are we really out of the woods yet?
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