Cautious outlook, selective buying keep market breadth weak

Since January, we can see a consolidation or profit booking in small-caps and mid-caps, and an outperformance in large-caps, which has led to a negative market breadth

The Indian benchmark indices – Sensex and Nifty – may well be touching record levels but the broader market trend still seems to be suggesting that investors are adopting a cautious approach and bulk of the buying activity is happening in select large caps that are driving the benchmarks.

The market breadth, which is a ratio of the number of stocks that gain ground as against the declines, has largely been weak on many days in the current calendar year even as the benchmarks have registered strong gains.
The market breadth, also known as the advance-decline ratio, is looked upon as an important metric to gauge investor sentiments and a weak ratio is considered to be a sign of investor pessimism.

In the current month till date, the market breadth on BSE is pegged at 0.99 even as the benchmark 30-share Sensex is up a marginal 1.25 percent and is hovering around record highs.

In February and March as well, the market breadth was weak even though the benchmark Sensex gained over one percent in each of the months. In February, the market breadth on BSE was at 0.96 and it was 0.83 in March. Sensex, meanwhile, moved up marginally by 1.04 percent in February and 1.59 percent in March.

Interestingly, the correlation has worked in both ways this year as the advance decline ratio in January was 1.18 when the Sensex lost 0.68 percent. Thereafter in March, the ratio was at 0.83 and the Sensex was up 1.59 percent.

“Since January, we can see a consolidation or profit booking in small-caps and mid-caps, and an outperformance in large-caps, which has led to a negative market breadth," said Sunny Agrawal, head of fundamental research at SBI Securities.

He further said that after the Securities and Exchange Board of India's comments on 'froth’ in small-caps and mid-caps; large-caps have been a preferred choice of investors.

On February 27, mutual fund industry body Association for Mutual Funds in India (AMFI) issued a circular based on an email received from SEBI. In a note to mutual fund trustees, AMFI said that SEBI has advised that given the froth in small and midcap stocks, mutual funds should put in place a policy to safeguard the investors in these schemes and conduct a stress test.
"We're seeing increased buying by Foreign Portfolio Investors (FPIs) in large-caps after concerns looming in small-caps and midcaps. An increased allocation going to large-caps and select large-cap stocks has caused a narrow rally in the markets, even with negative market breadth," said Nirav Karkera of Fisdom.

The BSE Midcap index has gained 17 percent and BSE Smallcap index is up 11 percent since January 1. In the same period, the Sensex has gained 13 percent.

Since January 1, Mahindra & Mahindra (48 percent), Power Grid Corp of India (36 percent), and Bharti Airtel (35 percent) have been the top gainers in the Sensex pack.

In the BSE Midcap index, the biggest laggards since January 1 are Zee Entertainment Enterprises which has lost 44 percent and Ramco Cements which lost 24 percent. In the BSE Smallcap index, Sanmit Infra and MK Proteins figure as top losers in the same period.

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