Fear Factor: Bears run show on Dalal Street

Mumbai: The bear grip on Indian equities is the strongest in recent years if a key long-term trend market indicator is to go by. Almost 86% of the country’s top 500 stocks are trading below the 200-day moving average (DMA) – an indicator that shows the long-term trend of a stock or an index.

It reflects the deep-rooted pessimism in the market at this juncture on account of unrelenting foreign institutional selling and growing risk-off sentiment among domestic investors.

In the Nifty 500 index, 427 stocks are trading below the 200 DMA, while 68 are above it, according to Axis Technical and Derivatives.

When a stock or an index is below the 200 DMA, it’s in a long-term downtrend and vice versa, reflecting the lack of buying interest among investors. Traders watch this trend indicator closely as a break below it indicates weakness. This trend was last seen during the market selloff in February and March 2020.

“Unless the stocks surpass the 200 DMA with good volumes, the corrective phase could continue,” said Ruchit Jain, vice president, head technical research, Motilal Oswal Financial Services.

Out of the stocks trading below the 200 DMA, 146 are trading 10-20% away from the average price and 135 are at a 20-30% distance, while 93 are as much as 10% away.

Since September 27, the Nifty 500 index has plunged 16.6% while the Nifty index slumped 13.8%.

Agencies

Oversold Territory
Analysts also consider 200 DMA as a contrarian indicator as it reflects extreme pessimism or optimism in stocks or indices. When sentiment becomes one-sided, contrarians look for reversals.

“The Nifty 500 basket is approximately 95% of the total market and only 13% of stocks are trading above their 200 DMA, which is a sign of a highly oversold trajectory,” said Rajesh Palviya, head of technical and derivatives, Axis Derivatives. “The pain in this basket has led to a slide in the market cap but it cannot remain in an oversold territory for long.”

There are challenges in the effectiveness of the 200 DMA as a contrarian indicator in a bear market driven by unrelenting foreign selling.

Overseas investors have pulled Rs 2.68 lakh crore from Indian stocks since October 1, the most they have sold ever.

“There are some hopes of the Nifty index rebounding and the broader market further gaining strength if the Nifty index holds above the crucial support level of 22,400,” said Jay Vora, senior markets analyst, indiacharts.com.

“However, if the Nifty index breaches and sustains below the 22,400 level then a further decline of 2-3% is expected that could exacerbate the declines in the broader market as well.”

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