Market indicators hinting at fatigue

Analysts said gains in the stock market have been restricted in the past when 70% of the stocks on the NSE 500 index trade above the 200-DMA.

The last time this level was breached was on January 17, 2022, when 73% of the NSE 500 stocks went above the 200-DMA. In the following month, the Nifty corrected 5.5%.

Analysts said this indicator coupled with various other factors are pointing to fatigue in the market after the record-breaking rally over the past three months.

“NSE’s market breadth, which generally remained positive since March bottom, has remained in favour of declining stocks for the last two days of the previous week,” said Apurva Sheth, head of market perspectives & research, SAMCO Securities. “There are several factors like BSE Smallcap index ending its longest winning streak, peaking market breadth and Nifty failing to cross the all-time high which suggest that traders would be better off taking leveraged bets off the table and even booking some profits.”

The last time when the Small-cap Index was on a winning streak for 12 consecutive weeks was from June 20 to September 2 last year. After the rally, the index fell by 5.63% by September 26. The Nifty 50 also fell in the same period.

Last week, the small-cap index broke its winning streak and closed 0.93% lower. Had the index closed on a positive note last week, it would have been the longest winning streak in the history of the BSE Smallcap index.The Nifty failed to cross its all-time high of 18,887.60 made on December 1, 2022, after coming close to it in 5 out of the previous six trading sessions.

On Monday, benchmark indices eked out gains in choppy trades with the Nifty closing at 18,691.20, up 25.70 points or 0.14% over the previous trading session. The Sensex ended at 62,970, down 9.37 points below Friday’s close.

Some analysts, however, don’t expect a big correction despite a large chunk of the stocks crossing the 200-DMA. “We are in a consolidating market, and this statistic (200-DMA) may not lead to the top formation, but correction within range-bound markets is quite likely,” said Siddarth Bhamre, research head at Religare Broking.

Analysts said investors have been on the side-lines awaiting a drop to buy afresh. “As the market has rallied for the last couple of months and trading near all-time highs, we expect some consolidation for the next couple of weeks and some corrective moves are likely with sectorial rotation as there is no earning risk based on the estimates,” said Rajesh Palviya, head technical derivatives, Axis Securities. “We don’t see significant downgrades risk at this juncture, as most domestic macro indicators are aligned and have growth trajectories.”