Stock market crash: Stock market sentiment has reached its most pessimistic level since March 2020, when Covid-19 triggered the previous market crash. The Advance Decline Ratio, a key indicator of market health and investor confidence, hit 0.72 in February, marking its lowest point in five years.
The diminishing ADR indicates a higher number of declining stocks compared to advancing ones, suggesting market weakness. The ratio stood at 0.9 in January, whilst previously maintaining levels between 1 and 1.28 on average before the market decline began in October, according to an ET report.
The primary indices – Sensex and Nifty – have declined approximately 15% from their September 27 peaks, influenced by Chinese market recovery, dollar strengthening and weakening domestic corporate performance, leading to substantial foreign investor exits.
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The broader market has experienced more significant declines, with the Mid-cap 150 index falling 20.3%, Small-Cap 250 index declining 24.4%, and the Micro-cap 250 dropping 23.8% during this period.
“The declining ADR indicates that the markets have been quite bearish due to a lack of buying interest, where the retail investors are shying away from buying and the foreign investors are engaged in persistent aggressive selling,” said Naveen Kulkarni, CIO, Axis Securities.
The market decline in January continued, with February experiencing heightened concerns regarding Trump trade tariffs, he noted. “The markets were excessively bullish prior to the declines last year, and the negative sentiment is also in excess in a similar vein,” he said.
Foreign investors have withdrawn investments totalling over ₹2.81 lakh crore since October’s sell-off commenced, with approximately ₹1.3 lakh crore of divestment occurring this year.
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“The markets have been declining for five consecutive months now and the trend remains weak due to lack of any domestic or global positive triggers,” said Harsha Upadhyaya, CIO, Kotak Mahindra AMC.
Investment experts have varying opinions on valuation levels following the consistent market decline since October.
According to Kulkarni, valuations in the broader market have become reasonable, with large-cap shares trading at lower levels.
“The markets are expected to be at the tail end of the sell off and once there is a palpable improvement in earnings, a revival is expected, said Kulkarni. “It is tough to catch the bottom but given that March is also expected to be a positive month seasonally, the selling could see a halt.”
Several fund managers believe that whilst earnings recovery is anticipated in upcoming quarters, mid-cap and small-cap shares continue to trade at high valuations.
“Despite the steep corrections, the valuations remain rich in the mid-cap and small-cap segment and the earnings deceleration was also more severe in this segment,” said Upadhyaya. “The adjusted valuation on large-cap stocks is a better bet for long time investors.”
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Market watchers view extreme Advance Decline Ratio readings as a contrary signal.
“The ADR in February is at the same level as March 2020, which indicates extremely oversold markets owing to extremely negative investor sentiment, which are close to a reversal in the short term that could sustain at least for a couple of months,” said Rohit Srivastava, founder, indiacharts.com.
He noted that confirmation would require positive breadth and price movement. “If Nifty moves over 22,500 levels it is likely to be confirmed”. The index finished at 22,082.65 on Tuesday.
Although a market rebound is possible, experts suggest it may lack sustainability without catalysts.
“While the falling ADR points to oversold markets, nothing exciting is anticipated in the short-term,” said Upadhyaya.
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