The Advance Decline Ratio (ADR), a widely watched indicator of investor sentiment, is at a daily average of 32% in November. Though similar to the readings in October, the ratio is lower compared to 47% in September and 51% in August.
A declining ADR means more stocks are falling against the gainers and points to a weakening market.
“The declining ADR ratio points to the loss of risk appetite of investors as they cut bets in the broader market, turn conservative and gravitate towards low volatility and quality stocks,” said Naveen Kulkarni, CIO, Axis Securities.
Benchmark indices – Sensex and Nifty – are almost 10% down from their peaks made on September 27, led by a sell-off by foreign investors sparked by a rebound in Chinese equities and disappointing earnings in the September quarter. The Midcap 150 index declined 10.9%, SmallCap 250 index dropped 9.1% and the Microcap 250 fell 8.3% in this period.
AgenciesThe latest sell-off in the broader market has been on account of the rich valuations in mid-cap and small-cap stocks. Even after the declines, their valuations are still elevated compared to large-caps.”NSE Midcap 100 index is trading at almost 30% premium to Nifty 50, which is a multi-year high as a lot of retail liquidity has found its way into mid-cap stocks, driving valuations up, said Nikhil Ranka, CIO equity alternatives at Nuvama Asset Management.”When markets fall, the volume in midcap typically dries up and the impact cost of selling gets magnified,” said Ranka.
“Due to correction driven by the foreign sell-off, most investors have witnessed around 20% erosion in their portfolios and are likely to shift to large-cap stocks until uncertainty subsides.”
So far in November, overseas investors sold `24,269 crore of Indian equities after the record selling of `1 lakh crore in October.
“We are shifting from a buyers’ market in the past couple of months to a sellers’ market now, amid the IPOs, QIPs and foreign selling,” said Kulkarni.
“Since supply is high, investors are in no hurry and waiting for the right price.” At the end of September, FPIs held 18.5% in NSE 500 stocks amounting to $650 billion. Taking into consideration $17 billion outflows in October and November, their holdings have come down to less than 16%, which is a 12-year low, said Ranka. The Nifty is expected to make a durable bottom at around 23,000 to 23,500 level, he said.
“Foreign selling should abate in December as FII activity is typically subdued towards the year-ends, investors can therefore look to deploy the excess liquidity over the next 15 days as December is anticipated to be better for the markets,” said Ranka.
Extreme ADR readings are also considered to be contrarian indicators. When the ADR falls too much, it is considered a sign of the market being oversold and vice versa. Since the ADR reading is still not at the year’s lowest level. which was 21,9% in March, investors are wondering whether the worst is over.
“It is not a raging bull market that we are in but over the next 6 months to one year Nifty could deliver a 13% to 14% return, which is not bearish at all,” said Kulkarni. “The pace of rebound in the markets is however expected to be sluggish.”