 "nifty50, bank, finance stocks")
The advance-decline ratio (ADR) — a barometer for overall market sentiment — dropped to its lowest since February 2023 amid a rout in the smallcap space.
ADR stood at 0.83, with losers exceeding gainers by nearly 400 on the BSE.
In March 2024, the Nifty Smallcap 100 had come off by as much as 13 per cent following valuation concerns raised by the regulator.
Meanwhile, the Nifty Midcap 100 index fell as much as 6 per cent and the Nifty50 index fell less than 3 per cent.
All the three indices recouped their losses, with the Nifty finishing the month with 1.6 per cent gain. The Nifty Midcap 100 and the Nifty Smallcap 100 dropped 0.54 per cent and 4.4 per cent, respectively.
This was the second straight month when losing stocks outnumbered gainers. In February 2024, small and midcap indices had ended with marginal losses. Declining stocks had outnumbered the advancing ones by only 89 last month.
More From This Section
Between April 2023 and January 2024, advancing stocks had outnumbered declining stocks for 10 straight months by an average of 272.
The weak ADR reading for the past two months is a sign that the market exuberance has cooled off a bit.
On March 13, 2024, the Nifty Smallcap 100 had plunged 5.3 per cent, while the Nifty Midcap 100 dropped 4.4 per cent in what was their biggest single-day fall in nearly two years.
The fall came days after Securities and Exchange Board of India (Sebi) chief Madhabi Puri Buch reiterated concerns over stretched valuations in the smallcap space. She said there are pockets of froth in the market, and it may not be appropriate to allow that froth to build up.
“The ADR is a function of small and midcap performance. We saw the small and midcaps underperform from early March, which has continued. There has been some recovery lately, but it is very patchy. Small and midcaps were due for a correction after a long-sustained uptrend. The outlook will depend on how the results season pans out. If the small and midcap firms post good results in the fourth quarter, we could see the return of buying interest. But it's still some time away — maybe towards the end of April or beginning of May,” said Deepak Jasani, head of retail research at HDFC Securities
“The regulator has also warned about elevated valuations, and that will remain in the mind of mutual fund managers as well as the investors, and until these cautionary statements come to an end, people will be vary,” he added.
After Sebi sounded caution, several fund houses have imposed restrictions on flows into their smallcap schemes.
Investors fear that the buying support provided by mutual funds in the past could be limited, going ahead. This is also hurting sentiment when it comes to investing in smallcaps.
“The midcap and smallcap corrections have triggered an alarm whether much deeper corrections are in the offing. This can also fuel broader risk off,” said HSBC equity strategists Amit Sachdeva and Anurag Dayal, in a note on March 21.
An analysis done by them showed that the correction has been deeper lower in the market cap (mcap) distribution chain.
For instance, companies with mcap of less than $2 billion fell over 7 per cent during the one-month period ended March 18
Those between $2 billion and $5 billion fell 5.8 per cent and between $5 billion and $8 billion declined 3.2 per cent.
On the other hand, companies with mcap between $8 billion and $10 billion rose close to 2 per cent during the same period. Those more than $10 billion fell by 1 per cent.
Following the sell-off in March, the market breadth for midcaps had declined to 73 per cent from over 90 per cent at the beginning of the year, says the HSBC report. The normal breadth tends to be around 60 per cent.
“At 73 per cent, midcap breadth has come down, but is still above long-term mean. This suggests a room for further correction if market conditions turn adverse,” the report added.
 "Chart")
