Pune, Maharashtra, India: The last few days have been full of action for the stock markets. The week opened with Sensex crossing the 19,000 mark for the first time since the peak of January 2008. More was to follow as the rally has continued today and has led to Sensex crossing Sensex@MRP for the June 2010 quarter which stands at 19295 as computed by MoneyWorks4me.com.

MoneyWorks4me.com is a stocks investing portal that helps apply Value Investing to Indian stocks. It has devised a method to arrive at the MRP of individual stocks as well as the benchmark index – the Sensex.

As individuals, we are familiar with the MRP tag which we look at whenever we shop for products. Similarly, stocks too have an MRP tag at MoneyWorks4me. The MRP of a stock is its intrinsic value and is arrived at by studying the fundamentals of the company. And Sensex too has an MRP tag here – Sensex@MRP. MoneyWork4me.com has been calculating the Sensex@MRP for the last 5 quarters. They have also backtested the method for a period of 10 years beginning FY 2000. The results of this were published as a part of a special report published in ‘Outlook Profit’ magazine titled ‘The Right Price’ in July 2010.

Sensex@MRP is calculated using the MRP of the composite Sensex companies and the free float market capitalization method used for calculating indices. The rule here is ‘if Sensex goes above Sensex@MRP, it signals that the market is moving from being rational to being irrational’. It means you have to become cautious because if it continues to rise further, this rise is not justified by increase in earnings; it would thus be time to start selling off.

And this is exactly what has happened over the last few days. According to MoneyWorks4me’s latest report, Sensex@MRP considering the June quarter results stands at 19,295. On September 13th Sensex crossed the 19,000 mark for the first time since January 2008 and ended the day at 19,208. The rally continued even on the 14th and the Sensex has subsequently crossed the Sensex@MRP for the June quarter

The rise seems to be fuelled by funds pumped in by the FII. Just to give you an idea till the 13th of September (8 days of trading), net FII inflow in the equity market aggregated to Rs. 4,600 Cr. This when the average monthly net FII inflow during a boom period usually ranges around Rs. 4,000 Cr. Also, from June till September 13th, net FII inflow has been Rs. 26,216 Cr, which is higher than the inflow (Rs. 24,132 Cr.) for the entire year of 2009. (Source for FII data – www.sebi,gov.in, Business Line)

Thus, according to the Sensex@MRP concept, the market has crossed its fair value and has moved into the region of irrationality. If it moves further up, one can be rest assured that it is the irrationality that is driving the markets and not the fundamentals. Clearly, if the FIIs decide to pull out money from the Indian markets, we could be in for a bumpy ride ahead. The back testing done by MoneyWorks4me.com also shows that historically whenever Sensex has crossed Sensex@MRP, it has been followed by a correction. This was evident during the tech boom of 2000, the rallies in 2006 and 2007 and most recently in January 2008.

Raymond Moses, Co-founder of MoneyWorks4me.com says, “Currently quite a few stocks are quoting above their MRP. As sensible investors, you should review your investments. If your stocks are quoting above their MRP and you have earned your expected returns, it is time to consider selling your stocks and booking profits!