bear market: an important gauge points to extreme bearishness

Mumbai: Trend indicators point to extreme bearishness in the stock market after the recent sell-off. Of the country’s top 500 stocks on the BSE, 86% trade below their 200-day moving average (DMA) — a measure used by market participants to determine the long-term trend in a stock or index. When a stock or index trades below 200-DMA, it would be in a bearish trend and vice versa, but extreme values ​​are also seen as contrarian indicators.

From the BSE-500 index, Solara Active,

, , , Housing, , , , , and are 48-68% away from their 200 DMAs. This means that pessimism in these stocks is high. Stocks in the financial sector are furthest from their 200 DMAs.

Analysts said that when 86% of the stock is away from their 200 DMAs, it is considered a contrarian indicator.

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“If nearly 90% of the stock is below 200 DMAs, this kind of readout usually means there could be an uptick,” said Rohit Srivastava, founder of Indiacharts.com. “From a one to three week perspective, we expect a rebound where the Nifty could go to 16,000 or higher. If that continues, 16,900 is possible.”

But in a bear market like the current one, the contrarian signal may not work. As foreign sales of Indian stocks continue unabated amid a weakening rupee, analysts said market recovery is usually short-lived due to selling at higher levels.

“I expect this rally to slow down sooner or later after stretching to 15,600-15,700,” said Sriram Velayudhan, vice president of alternative research at IIFL.

“Percentage of FPI shorts from the long and short index futures open rate of FPIs is close to 80% and they know the risk that the current environment poses.”

He said it will be critical for the Nifty to cross 16,000 for the rebound and sustain.

“Most indicators point to a state of caution. Until 16,900 are out, we are not out of the woods,” Velayudhan said.

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