Market breadth turns bearish; 63% of Nifty 500 stocks below long-term avg

Analysts suggest, the markets are worried about implementation of protectionism measures by the new leadership in the US and evolving deflationary conditions especially in China.

The prolonged weakness in the benchmark indices seems to have taken a toll on the overall market breadth, with a vast majority of the stocks now trading below the long-term moving average. The 200-Day Simple Moving Average (DSMA) is said to be the long-term moving average, and stocks trading above the same are said to be holding a positive (bullish) bias and vice versa.  As of Friday, a vast majority i.e. 316 stocks or 63 per cent of the Nifty 500 stocks had dropped below this key moving average. Similar, is the case with index frontliners' - 31 out of the Nifty 50 stocks were seen trading below the 200-DSMA.  In case, of the Nifty MidCap 150 and SmallCap 250 indices - 95 out of the 150 midcaps and 144 out of the 250 smallcaps had slipped below the long-term threshold.  The NSE Nifty 50 index had dipped to a low of 23,344, and was down 0.8 per cent at the lowest point of the day. When compared with its long-term moving average, the index has been quoting below the same for the last five trading sessions. The Nifty 200-DSMA now stands at 23,907.    According to Sameet Chavan, Head Research, Technical and Derivative - Angel One, the Nifty is seen testing crucial support around 23,500 – 23,450 levels, which has served as a solid base since December and aligns with the lower boundary of a 'Falling Channel' pattern on the hourly chart.  "A sustained breakdown below the mentioned levels could drive prices lower toward 23,200 – 23,000. Conversely, the immediate resistance lies at the upper end of the Falling Channel, around 23,700 – 23,750, followed by a stronger barrier at 23,900 – 24,000, marked by the 200-DSMA," Chavan said.  On a fundamental level, global markets, analysts suggest, are worried about implementation of protectionism measures by the new leadership in the US and evolving deflationary conditions especially in China.  Continued strengthening of the US dollar, signs of weakness in the Chinese economy and expectation of severe protectionism measures from the new leadership in the US, said G Chokkalingm, founder and head of research at Equinomics Research, could lead to continued volatility in the global markets, which in turn could possibly impact FII inflows into the Indian markets in the short-term.    "Generally, FIIs would wait for Budget outcome before making any significant decisions. They would also wait for local currency to stabilize before committing any significant investments. Therefore, their selling may continue till Budget is presented or even till March 2025," Chokkalingm said.  Foreign Institutional Investors (FIIs) have been aggressive sellers in Indian shares for the last four months. As per data available from NSE, FIIs have net sold stocks to the tune of Rs 19,103 crore so far in January. Over the last four months, starting  October 2024 they have offloaded shares worth Rs 1.97 lakh crore.  The persistent selling by FPIs (Foreign Portfolio Investors) and consolidation in global markets are the two key reasons for the market fall, says Kranthi Bathini, director - equity strategy at WealthMills Securities. However, Kranthi believes that the market tends to pullback on testing the long-term moving average. Going forward, the upcoming Q3 earnings and the Union Budget can help revive the market mood.