Investor apprehension continues to grip the market as the advance-decline ratio, a pivotal gauge of market health, persists below the critical threshold of 0.4 for the third consecutive trading day. This sustained imbalance, where the number of declining stocks significantly outweighs the advancing ones, underscores the prevailing pessimism among market participants and signals a deepening bearish sentiment in the financial markets.
Understanding the advance-decline ratio is crucial for gauging market sentiment. A ratio of one implies an equal number of rising and falling stocks, while a ratio below one indicates that more shares are declining than advancing, highlighting a negative sentiment among investors.
On March 13, data from the Bombay Stock Exchange (BSE) revealed a stark picture: out of a total of 3,914 listed stocks, only 394 managed to post gains, while a substantial 3,461 stocks experienced declines. This imbalance resulted in a noteworthy advance-decline ratio of 0.13 for the day, marking a significant decrease from 0.28 on March 12 and 0.39 on March 11.
Such a dramatic decline in the advance-decline ratio reflects the intensification of bearish sentiment in the market, raising concerns among analysts and investors alike. Despite occasional fluctuations, the ratio has predominantly remained below the 0.4 threshold, highlighting the sustained negative bias prevailing in the market sentiment.
Furthermore, the broader market trends in March paint a concerning picture. With only four days recording a ratio above 1, and the remaining trading sessions consistently below this benchmark, the bearish sentiment appears to have firmly entrenched itself in the market psyche. Notably, the ratio of 0.7 recorded so far in March marks its lowest level since March 2020, underscoring the severity of the current market sentiment.
Analysts attribute the growing bearishness to various factors, including the recent correction observed in mid-, small-, and micro-cap stocks. Concerns over high valuations and recent regulatory actions have also contributed to making potential buyers increasingly wary, particularly in the small- and micro-cap segments, which have faced the brunt of the selling pressure.
The catalyst for the recent selloff can be traced back to the Securities and Exchange Board of India’s (SEBI) directive to the Association of Mutual Funds in India (AMFI), cautioning about froth in small- and mid-cap stocks and urging moderation in related schemes. While this directive played a role, market weakness had begun to manifest even before this development, underscoring the broader challenges and uncertainties currently plaguing the market.
In a recent analysis, Deven Choksey, Managing Director at DRChoksey FinServ, pointed out that prevailing market trends are likely to persist as March-end approaches. He noted that brokers are preoccupied with advance tax filing obligations, while traders are focused on closing their books, signaling a prevailing selling mood in the market. Choksey also highlighted the impact of the Securities and Exchange Board of India’s (SEBI) warning regarding froth in small- and mid-cap stocks, which has made the market nervous, leading to increased selling pressure. However, Choksey emphasized that despite these short-term market dynamics, the underlying fundamentals of high-quality stocks haven’t changed overnight. He suggested that corrections observed in such stocks may present buying opportunities for investors seeking long-term value.
Examining the performance of key market indices, it’s observed that so far in March, the Sensex and Nifty have recorded modest gains of 0.6% and 0.4%, respectively. In contrast, the BSE MidCap and SmallCap indices have experienced declines of 3.5% and 9.3%, respectively, during the same period. Looking at the year-to-date performance, the Sensex and Nifty have registered gains of over 1.1%, while the BSE MidCap index has risen by 3.2%. However, the BSE Smallcap index has seen a decline of 3.7%. Notably, data indicates that in March, Domestic Institutional Investors (DIIs) purchased stocks worth Rs 19,540 crore, while Foreign Institutional Investors (FIIs) bought stocks worth Rs 22,156 crore from Indian markets, suggesting continued interest from both investor categories despite market volatility.
Rajesh Palviya, Head of Technical Research at Axis Securities, offered insights into the current market sentiment, highlighting the significance of the advance-decline ratio as an indicator of market panic, particularly in the mid- and small-cap segments. Palviya attributed the correction observed in these sectors to regulatory warnings regarding valuations, which he views as a healthy sign for the market. He noted that quality stocks faced sharp declines due to margin triggers, prompting traders to trim their trading books.
Amidst the market correction, some analysts suggest that mid- and small-cap stocks may have been oversold, potentially indicating an opportunity for a rebound in the upcoming trading sessions. This sentiment underscores the market’s resilience and the potential for selective buying opportunities amidst ongoing volatility.
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