Market Benchmarks: The benchmark Nifty index has undergone a modest 2.5% correction in October, but a deeper analysis reveals more significant concerns for investors. The advance-to-decline ratio for Nifty 500 stocks this month has plunged to 0.39, marking its lowest level in sixteen months, indicating the severity of the ongoing market correction. In this article, we delve into the implications of this metric and its impact on the broader market for Market Benchmarks.
Advance-to-Decline Ratio Highlights Market Stress
The advance-to-decline ratio, which measures the number of advancing stocks to declining stocks in the Nifty 500, is a crucial indicator of market sentiment. It offers a more nuanced perspective than mainstream indices, where a few high-performing stocks can mask underlying market turbulence. The current ratio underscores a far from tranquil market environment.
Numerous Stocks Experience Significant Declines
About 360 of the Nifty 500 stocks have seen their prices decline in October, contrasting with only 36 of the Nifty 50. Notably, many stocks from cyclical and emerging sectors that had surged ahead of their revenue and earnings prospects are now witnessing a reversion to the mean. This retracement reflects a correction in overvalued stocks, particularly in the mid- and small-cap segments.
Impact on Various Market Indices
While the Nifty 500 index registered a 2.7% decline in October, the Nifty Midcap 100 and Nifty Smallcap 250 indices experienced more substantial drops of 4.5% and 1.7%, respectively. Approximately 65 of the Nifty 500 stocks have fallen by 10% to 25% during October, affecting a range of sectors.
Prominent Declines in Specific Stocks
Several individual stocks, such as Sterling & Wilson, Triveni Turbine, NMDC Steel, M&M Financial Services, Biocon, HUDCO, and Finolex Cables, have witnessed significant declines, ranging from 18% to 25% since the beginning of October. These corrections highlight the challenges faced by mid- and small-cap stocks that had seen remarkable rallies in the previous months.
Rethinking Valuations and Business Models
Sanjeev Prasad, co-head of Kotak Institutional Equities, observes that while some mid- and small-cap stocks have recently experienced declines, these corrections appear limited compared to the previous substantial price surges. This raises questions about the value proposition of these stocks, given the significant multiples re-rating they have undergone over the past 9-12 months, despite weakening business models and eroding competitive advantages.
Gains Evaporate for Some Stocks
Some stocks, including Biocon, AAVAS Financiers, Petronet LNG, Indraprastha Gas, Bandhan Bank, Sapphire Foods, and Indus Towers, have entirely relinquished their gains accumulated between January and September during the month of October. This reflects the swift and substantial correction in the market.
Market Pessimism or Potential Reversal?
Amar Ambani, head of institutional equities at YES Securities, points out that customised ratios and indices reveal extreme pessimism in sectors like banking and small caps, as well as in the Nifty. While this might be concerning, it could also signify the possibility of a sharp price reversal or the market reaching a bottom and entering a corrective phase for some time. Investors will need to closely monitor these indicators to assess the market’s direction in the coming months.