Market breadth turns healthy after March as Covid-19 cases decline globally

In simpler terms, each day of April, on an average, there have been two stocks that close with gains for every one stock that ends with losses

The market has seen a 180-degree turn in sentiment if the advance-decline ratio is anything to go by. This key gauge for market breadth has improved from 0.7 times in March to nearly 2 times, so far this month. The high reading indicates that stocks across the board have seen buying interests after dropping to multi-year lows. 

Investor appetite for risk assets globally has seen a quick and dramatic improvement, underpinned by trillions of dollars worth of rescue packages unveiled by central banks. Also, a slowdown in the number of new Covid-19 cases in key geographies has aided this turnaround.

In simpler terms, each day of April, on an average, witnessed two stocks closing with gains for every one stock ending with losses. The benchmark Sensex is now up 21.8 per cent from its 2020 low of 25,981, logged on March 23. The broader market BSE 500 index has marginally outperformed with a gain of 22.5 per cent during the same period.

Last month, before the market recovery, it was the other end of the spectrum — with four stocks ending with losses for each ending with gains. At least on two occasions, more than 10 stocks had ended with losses for every one that advanced, underscoring the pessimism among investors.

 

 

When the benchmark Nifty plunged to a four-year low on March 23, the advance-decline ratio for the month was below 0.5 times — a record low reading. The reading was lower than that during the months of the 2008-09 Global Financial Crisis when the markets saw worst sell-off.

Dharmesh Shah, head–technical, ICICI Direct, says a weak reading of the advance-decline ratio can be a buy signal. 

“One of the key technical tools to measure the extent of panic in the markets is net of advancing stocks to declining stocks,” he says, adding that the reading in March was one of the worst-ever.  

“During major corrections of 2015, 2010, 2008, and 2006, each measuring at least 30 per cent from respective lifetime highs and associated with global sell-off, the net A/D ratio for the NSE 500 had approached the extreme oversold condition of -496, -466, -494, and -487, respectively. These extremes typically have coincided with significant market bottoms,” he observes.

On previous occasions, the market recovery has been led by large-caps and blue-chip names. However, in the latest rebound, the market brought huge gains not just for large caps but several stocks belonging to the mid- and small-cap universe.

"A lot of mid-cap stocks had fallen badly even before the Covid-19 crisis. They corrected further when during the sell-off triggered by the pandemic. This made valuation even more attractive. In comparison, large-caps hadn’t fallen much maybe 20-30 per cent," said G Chokkalingam, founder, Equinomics.