Advance-decline ratio falls to two-year low as small and mid-cap stocks lose heavy ground

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The average advance to decline ratio, which is a key metric to ascertain investor sentiment, has dropped to the lowest level in nearly two years.

The ratio, which measures the number of rising stocks against those declining, has dropped to 0.82 in January -- the lowest since February 2023.

This signals increasing market uncertainty as small- and mid-cap stocks continue to underperform, reflecting broader bearish sentiments among investors.

Prashanth Tapse, Senior VP (Research) at Mehta Equities, believes that the advance-decline ratio falling below 1 for the second consecutive month indicates a bearish trend or a consolidation phase.

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In a similar context, Anand James, Chief Market Strategist, Geojit Financial Services said that February has historically given negative returns 58% of the time in the last 12 years and this could be at the back of the minds of the traders.

Another view is that the low advance decline ratio is an indication that smart money is moving out of high priced or weak stocks into new leaders.

So far in January, both benchmark Sensex and Nifty fallen over 5 percent each while broader indices like BSE MidCap and BSE Smallcap lost nearly 9 percent each.

Meanwhile, analysts believe the short-term trend of Nifty continues to be negative with the market now placed at the support of around 22700-22650 levels with the immediate resistance at 23000 levels.

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Experts attribute the pessimism to expectations of policy-driven stimulus. A market-friendly Union Budget could act as a catalyst for recovery. However, failure to address economic concerns could prolong the downturn into the next earnings season or beyond.

The market's previous exuberance, characterised by soaring valuations and easy profits, has given way to caution. Factors such as global economic headwinds, rupee depreciation, sustained selling by Foreign Institutional Investors (FIIs), and a steady rise in 10-year bond yields have compounded the uncertainty.

Kkunal Parar, VP of Technical Research and Algo at Choice Broking, advises against undue alarm. He points out that the market is recalibrating to fairer valuations after prior overenthusiasm. While volatility may persist until the Union Budget on February 1, stabilisation could follow in February, though a meaningful recovery might take until March. Notably, the Nifty remains below its 200-day moving average, a key technical resistance level.