Five market breadth indicators that every cautious investor must know

The Nifty on Wednesday closed in the red for the sixth straight day ahead of the rate decision by the US Federal Reserve. The index in the past six sessions has declined 786 points, or 4.8 per cent, to 15,692. In the past two months, the index has dropped over 13 per cent amid rising inflation and bond yields. 

In a note, IIFL Alternative Research has highlighted five market breadth indicators that signal extreme caution among investors.

Stocks above 200-day moving average (DMA)

Over 80 per cent of stocks in the BSE 500 universe are trading below their 200-DMA — an important technical gauge for market sentiment. This is the lowest reading since May 27, 2020, when 83 per cent of stocks were trading below their 200-DMA.

Sriram Velayudhan, vice-president, IIFL Alternative Research, says the 200-DMA had proved to be a good signal for market capitulation during earlier sell-offs, such as the 2008 global financial crisis or the 2013 taper tantrum.

Nifty versus 200-DMA premium/discount spread

Nifty versus 200-DMA premium/discount spread — another reliable lead indicator — now trades at a spread of 9 per cent.

In simple terms, Nifty is currently 9 per cent below its 200-DMA. On quite a few occasions, bouts of corrections tend to reverse when this indicator is in the range of 12-15 per cent spread.   

52-week high-low 100-DMA versus NSE 500

The 52-week high-low barometer is a 100-DMA graph of the difference between stocks hitting 52-week highs and lows in the NSE 500 universe.

When this graph hits 40 or minus 30, it’s a good signal of the market heating up or getting oversold.

Currently, the gauge has slipped into negative territory.

“Barometer has some more room on the downside (weakness likely to persist) and has just crossed the neutral zone,” says Velayudhan.

60-DMA of advance/decline ratio

This gauge is currently below minus 200 and approaching multi-year lows of minus 300. In the past, the market has rebound after dropping to 200.

“We believe there is some more room on the downside,” says Velayudhan.

Foreign portfolio investor (FPI) shorting

FPI shorting interest in index futures now stands at the highest levels since the inception of this data on exchanges, according to IIFL Alternative Research.

The FPI share of shorts in the index futures out of long-short FPI index futures open interest stands at about 89 per cent at present.