Advance-decline ratio hits 5-month high, sustaining positive momentum amid turbulence

The average advance-to-decline ratio of all BSE stocks in September stood at 1.20—the highest level since April 2023.

A widely used market breadth indicator signals positive momentum despite recent market turbulence. The advance-decline ratio, which compares the number of rising stocks to falling stocks, has remained above 1 for seven straight months, hitting a five-month high in September.

The average advance-to-decline ratio of all BSE stocks in September stood at 1.20—the highest level since April 2023. In August, the ratio was at 1.15, and in July, it was at 1.11.

In September, Indian markets saw huge volatility due to several negative factors, including a strong US Dollar Index and higher US bond yields amid expectations Fed may keep higher rates for a longer period, rising oil prices, foreign portfolio investment outflows, and India's growing trade deficit.

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Analysts said Indian markets remain bullish despite global volatility, thanks to positive factors such as strong economic fundamentals and India’s inclusion in JPMorgan’s bond index. This move is expected to attract billions in investments, helping India finance its current account and fiscal deficits.

“Investors’ confidence in India is bolstered by strong economic data, higher GST collections driven by increased manufacturing, and anticipation of improved corporate earnings. Additionally, the recent G20 summit has helped mitigate the impact of rising oil prices and attracted increased foreign direct investment (FDI) across various sectors, including renewable energy, defence, and pharmaceuticals, opening new opportunities,” said Rajesh Palviya, an analyst with Axis Securities.

In the coming quarters, politics will overshadow economics. State and national elections in India, as well as anticipated elections in the US, Taiwan, and Russia, will be the primary drivers of market activity and fund movements. Additionally, the irregular monsoon in India may affect rural demand this year, analysts said.

So far in September, flagship indices Sensex and Nifty have risen 1.5 percent and 2 percent, respectively, while the BSE MidCap and Smallcap have gained 3.65 percent and 1.13 percent, respectively. Since the beginning of April till date, the Sensex and Nifty have risen 11.6 percent and 13.13 percent, while the BSE MidCap and SmallCap have advanced 34.4 percent and 39.34 percent, respectively.

Meanwhile, Brent crude jumped around 10 percent while in the last three months it surged over 26 percent.

“We are cautious on the immediate short-term prospects of the markets, especially mid and small caps, where we see a need to consolidate recent gains considering the sharp runup during the last six months. We expect market breadth to narrow from the current levels,” said Devarsh Vakil, Deputy Head – Retail Research, HDFC Securities.

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However, for the longer term, several analysts continue to remain optimistic about Indian equity markets. Recent GST collections exceeded expectations, and analysts anticipate a continued strong performance during the upcoming festive season. Furthermore, the inclusion of Indian bonds in the JP Morgan bond index from June 2024 is expected to attract significant inflows, reducing government borrowing costs, bolstering the Indian rupee, boosting bond markets, and enhancing the country's credit rating.

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