Market breadth signals recovery: Advance-decline ratio hits 4-month high

While global central banks are easing policies, India has maintained a stringent stance with no immediate plans to lower rates.

Market breadth, which is a widely used metric to gauge investor and market sentiment, is showing a positive momentum despite the recent market volatility. The advance-decline ratio, which compares the number of rising stocks to falling stocks, had hit a four-month high in November. The average advance-to-decline ratio of all BSE stocks in November stood at 1.09 -- the highest level since July. In October and September, the ratio remained below 1 due to huge corrections in the local equities.

Kranthi Bathini, director of equity strategy at WealthMills Securities, attributes the trend to selective market correction amidst broad-based buying even as sectoral and flagship indices were hovering at significantly lower levels compared to their September highs. Increased participation from retail investors and domestic institutions are driving market advances, he said.

Bathini highlighted that investors are engaging in bottom-fishing, focusing on long-term opportunities despite global uncertainties, growth challenges, and a subdued earnings season. Valuations remain elevated, yet investors are undeterred, prioritising a long-term perspective.

Analysts, however, caution about growth headwinds in the short- to medium-term. Future market direction will hinge on the Reserve Bank of India's (RBI) monetary policy decision, especially regarding interest rates. While global central banks are easing policies, India has maintained a stringent stance with no immediate plans to lower rates.

Additionally, the upcoming full-fledged Union Budget will serve as a key market trigger, they say. Analysts noted that capital expenditure (capex) has slowed this year due to the election cycle. Foreign institutional investors (FIIs) are expected to stay cautious and maintain a sideways approach to India in the near term. Market performance in the latter half of the year will depend on domestic growth trends and the impact of global policies, particularly from the US.

India's flagship Sensex gained 0.5 percent and Nifty fell 0.3 percent in November while broader indices BSE MidCap and BSE SmallCap risen 0.3 percent each. Since September high till date, Sensex and Nifty fell 7 percent each while BSE MidCap and BSE SmallCap fell 7 percent and 3 percent respectively amid continued FII selling.

Over the past two months, FIIs have withdrawn over $13 billion from Indian equities. Initially, this was a tactical shift, as funds pivoted to China following a stimulus-driven rally in late September. The trend got exacerbated by disappointing Q2 corporate earnings, which undermined the rationale for India’s premium valuations. The situation worsened after Donald Trump’s victory, which reignited optimism around "America First" trade policies, driving funds back to the US amid expectations of tax cuts and tariff hikes.

Beyond local growth concerns, the "Trump trade" and continued dollar strength kept global investors cautious. While domestic inflows remain strong, weak earnings growth for the fiscal year may delay fresh allocations, say analysts. As the year-end approaches, seasonal holiday sluggishness is expected, leaving local mutual funds and retail investors as key market drivers. Markets are likely to consolidate with a slight upward bias, as fund managers aim to close December on a positive note.