Market breadth improves as stocks rebound, ADR set for highest in 12 months

Foreign portfolio investors (FPIs) have stepped up their selling of domestic equities in the past one week

The advance-decline ratio (ADR), a barometer for overall market sentiment, has improved sharply this month amid a broad-based recovery in stock prices from their lows in March.

If the momentum sustains, the ADR this month could be best in 12 months. Last month, ADR had worsened to 0.8 amid a rout in the smallcap space. With 2,453 stocks advancing and 1,851 declining so far this month, the ADR currently stands at 1.3, the best since April 2023. The ADR would have been even better if not for straight losses in the previous three trading sessions amid global headwinds such as rising US bond yields and flare-up in geopolitical tensions in West Asia.

Foreign portfolio investors (FPIs) have stepped up their selling of domestic equities in the past week.

Deepak Jasani, head of retail research of HDFC Securities, said trader interest had shifted to small and midcap once again amidst the selling by overseas funds in the last few sessions.

"FPI interest is largely in the largecaps. By continuously having long positions in largecaps, traders face the risk of FPI selling," he said.

In March, the Nifty Smallcap 100 index came off by as much as 13 per cent following valuation concerns raised by the regulator. The fall came after Sebi chief Madhabi Puri Buch reiterated concerns over stretched valuations in the smallcap space. Buch said there were pockets of froth in the market, and allowing that froth to build up may not be appropriate.

Despite the restrictions imposed by several fund houses on flows into their smallcap schemes, investors have shown a proactive approach by buying beaten-down stocks in the smallcap segment. This optimistic behavior has led to a 6.9 per cent rise in the Nifty Smallcap 100 so far this month.

"The selloff in smallcap and midcaps lasted for a few weeks after Sebi chief's warnings. But it dissipated fast. Once the effect wore off, investor interest in those stocks renewed as they found value in certain small and midcap stocks in those lower valuations," said Jasani.

Going forward, analysts said the enthusiasm towards smallcaps will continue for some time, but it will be more stock-specific as the result season has started.