Nifty: Tracking benchmarks? Please read broader market carefully

Mumbai: The benchmark Nifty has only corrected 2.5% in October so far, but granular data suggests bigger woes for investors. One such number, the advance-to-decline ratio for Nifty 500 stocks this month stands at 0.39, marking its lowest level in sixteen months, thereby underscoring the severity of the ongoing correction. This metric provides a deeper insight into the broader market trajectory compared with frontline indices where select performing stocks can drive the benchmarks, giving the impression of a much calmer market.


About 65 Stocks Down 10-25%
About 360 of the Nifty 500 stocks declined in October compared with 36 of the Nifty 50 from their price at the end of September.

Many stocks from cyclical and emerging sectors have run way ahead of their revenue and earnings visibility and are witnessing a reversion to mean, said analysts.

“The lower advance-to-decline ratio clearly indicates that market participants are not comfortable with the premium valuation of stocks, especially in the mid- and small-cap space,” said Manish Chowdhury, head of research, StoxBox. “In a high-interest rate environment, markets have slowly started to discount the long-term implications and (this) is visible in the recent correction of stocks across market capitalisations.”

While the Nifty 500 index declined 2.7% in October, the Nifty Midcap 100 and Nifty Smallcap 250 indices fell 4.5% and 1.7%, respectively. About 65 of the Nifty 500 stocks have declined between 10% and 25% so far in October.

Stocks like Sterling & Wilson, Triveni Turbine, NMDC Steel, M&M Financial Services, Biocon, HUDCO, and Finolex Cables have experienced significant declines, ranging from 18% to 25% since October 1.

“Several mid- and small-cap stocks have seen sharp declines over the past week, but the correction in their stock prices is rather puny compared to the rally witnessed in their stock prices over the past 6-7 months,” said Sanjeev Prasad, co-head, Kotak Institutional Equities. “We do not find value in most mid-and small-cap stocks given the extent of rerating in multiples seen in the past 9-12 months despite weakening business models and eroding business moats.

Notably, many stocks such as Biocon, AAVAS Financiers, Petronet LNG, Indraprastha Gas, Bandhan Bank, Sapphire Foods, and Indus Towers have relinquished entire gains accrued between January and September in the month of October alone.

“Customised ratios and indices suggest extreme pessimism in sectors such as banking, small caps, and the Nifty,” said Amar Ambani, head of institutional equities, YES Securities. While this may seem concerning, it could indicate the potential for a sharp price reversal or the market bottoming out and undergoing a corrective phase for some time.

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