Record advance-decline for April: False start or reason to be bullish?

Strong Breadth

Notwithstanding yesterday's correction which saw the benchmark indices slip more than a percent, the data for April shows that market momentum may be touching a new high. The data for April 1-12 showed that the advance-decline ratio was at 1.51, which is the best for BSE-listed companies since June 2020, recording a 45-month high.

Considering the market fall of April 15 trading session when the declines were more than the advances, the updated advance-decline ratio stands at 1.31. As many as 3,043 stocks declined while 877 shares advanced on April 15. The number of shares that are advancing in the month of April now stands at 2,447 while the ones that are declining stand at 1,862.

This is stark improvement compared to March 2024 advance-decline ratio of 0.83 with 1,943 stocks advancing as compared to 2,334 stocks declining.

The advance-decline ratio of 0.83 in March 2024 has been one of the worse market breadth seen since May 2018 when the advance-decline ratio was at 0.82 levels. The Securities and Exchange Board of India's (SEBI's) warning of "froth" in small and midcap shares, mutual fund body AMFI asking its members to moderate inflows into small and midcap equity schemes, advance tax payments leading to a liquidity crunch and the Enforcement Directorate raids on entities allegedly laundering the funds of Dubai-based hawala operator HS Tibrewala have weighed on market sentiment in March 2024.

April performance shows remarkable improvement in the market breadth when compared to March.

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Market performance after high advance decline ratios:

Darpan Patil of Rupic Consultancy said: "Strong market breadth reflect the market sentiment. Advance/decline ratio is one of the most basic market breadth indicator which helps us understand how many stocks are advancing versus how many are declining. Usually a very high advance decline ratio can be interpreted as markets nearing its peak while very low advance decline ratio can indicate nearing market bottoms.”

The below table highlights various period where the advance decline ratios have been higher than 1.4 and how the key benchmark index Sensex performed post such strong breadth in the markets.

Market trends@ Advance -Decline ratios

Moneycontrol found that the markets on an average have advanced in 3-, 6- and 12-month period after posting above average advance decline ratios or when the market breadth has been strong. The exception being the period December 2007, the period impacted by Global Financial Crisis (GFC).
Darpan added: "Markets have bounced back sharply in April recovering from the panic sell-off triggered in March with momentum stocks outperforming the benchmark indices. The liquidity is strong and FIIs have turned net buyers in April- adding to the optimism. Seasonality is also at play as April tends to be the best month for broader markets as reflected by performance of Nifty Smallcap 100 index. Nifty Smallcap 100 Index in the past 10 years has given on an average 4.9 percent returns in April. It is difficult for market to maintain the current advance -decline ratio of 1.51."

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