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Broad-based rally shows fatigue signs, say experts

Mehul Shah & Sameer Mulgaonkar / Mumbai Feb 23, 2012, 00:46

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Advancing stocks are outpacing declining ones on the Bombay Stock Exchange (BSE) this year, indicating marked improvement in the market breadth compared to 2011. However, the advance-decline ratio has declined marginally in February, compared with last month, suggesting the rally is now slowing down.

The BSE benchmark index, Sensex, has gained 17 per cent so far, this year, as overseas investors pumped close to Rs 26,401 crore ($5.29 billion) in Indian markets. On an average, over 350 more stocks have been advancing on a daily-basis compared to declining ones on BSE this year, data compiled by BS Research Bureau shows.

In January, 423 more stocks were advancing daily than declining ones on average, highest since May 2009. The average advance-decline ratio for January was 1.36. The last time average monthly advance-decline ratio stood above 1 was in April 2011.

The improved market breadth indicates the current rally is more broad-based in nature, experts say. This is also evident from the fact that gains in mid-cap and small-cap stocks have been higher than their larger peers. The BSE Midcap index has gained 24 per cent in this year so far, while the BSE Smallcap index has advanced 26 per cent during the same period.

“Going by number of stocks advancing as well as pick-up in trading turnover, it’s apparent that there is an enhanced participation from market players. Rally in market with more participation of stocks, participation from more market players and higher trading volume, suggest better sustainability of markets,” said Jignesh Shah, executive director at Sarasin-Alpen (India), a unit of the Swiss wealth manager controlled by Rabobank. “Going by all these indicators and also with European issue taking a backseat, we expect the rally would continue. However, with fiscal challenges, there could be an interim volatility.”

There are already signs that the market is starting to take a breather after sharp gains. In February, on an average, 193 more stocks are advancing daily than declining ones. The average advance-decline ratio has come down to 1.14. Experts believe sustainability of the rally will largely depend on how fast fundamentals catch up.

“Liquidity has driven the current rally so far. Even though it’s stronger, it sort of mimics the earlier rallies in August – November 2010 and March – April 2011 periods. And, we know what happened to those rallies,” said Anish Damania, business head – institutional equities, Emkay Global Financial Services. “Everything has moved up due to the risk-on trade. But, fundamentals will come into play at some point. I don’t think we have hit bottom of earnings downgrade cycle,” he added.