Why the sharp August rally in stocks raises more concerns than jubilation

Despite a 5,000-point surge by Sensex, overall market breadth was the worst since March 2020 when stocks had collapsed following the spread of the Covid-19 pandemic

The sharp up move in the market in August has raised more concerns than jubilation. The benchmark Sensex rose by nearly 5,000 points, or 9.4 per cent during their month—its best monthly showing in nine months. Despite this, the overall market breadth was the worst since March 2020 when the stocks had collapsed following the spread of the covid-19 pandemic.

In August, 1,755 stocks listed on the BSE advanced, while 1,888 fell, resulting in an advance-decline ratio of 0.93. Since April 2020, the market breadth has been negative only on one other occasion in March 2021. Also, the returns on the Nifty Smallcap 100 index turned negative for the first time this year at -2.5 per cent. “It was a strange month for the market in more than one way. While the headlines pointed to a bull run, there is some pain building underneath the surface,” said an analyst.

Even if one dissects the Sensex performance, only a handful stocks propelled the index in August with just seven index components accounting for two-third of the gains.

Experts said recent buying notwithstanding, foreign portfolio investor (FPI) flows have turned muted in recent months. This coupled with concerns around valuations and earnings is weighing on market performance, believe experts. “We have had 12 months of really strong flows from foreign flows until June 2021. But this quarter, we have seen softness in FPI flows. But domestic flows—household savings moving into equities—are really holding up the markets. Our view is that since we have seen India perform really strong despite not delivering the kind of earnings growth that other emerging markets have given, there could be some period of consolidation,” said Sunil Tirumalai, Equity Strategist, UBS Securities. The brokerage has a 12-month Nifty target of 16,000, indicating some correction from current levels.