Nowhere to hide: Market breadth hits five-year low in a sign of growing caution

A declining A/D ratio indicates that more stocks, particularly small- and mid-caps, are facing losses rather than gains.

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A key indicator of market breadth is signalling growing caution among investors. The average advance-to-decline (A/D) ratio, a measure of the number of rising stocks versus those declining, has fallen to its lowest level in five years, according to a Moneycontrol analysis. Analysts are attributing this decline to uncertainty in markets and fatigue regarding the near-term outlook.

So far in February, the advance-to-decline ratio has fallen to 0.77, which is the lowest reading since March 2020, when it hit 0.72 in a pandemic-induced global selloff. This is the third consecutive month and the seventh instance in the past one year, when the ratio has fallen below 1.

In January, the average ratio stood at 0.9, and 0.99 in December. A declining A/D ratio indicates that more stocks - particularly small and mid-caps - are clocking losses rather than gains.

"This decline reflects growing market uncertainty, with small and mid-cap stocks underperforming and signaling a broader bearish sentiment among investors. Alternatively, it can also be interpretive that the low ratio is also a sign that institutional or ‘smart money’ is shifting away from overvalued or weaker stocks and into emerging market leaders", Shitij Gandhi, Research Analyst (Technical), SMC Global Securities said.

Indian equities have experienced significant volatility in February, with benchmark indices Sensex and Nifty 50 declining by around 4 percent each. The broader BSE Mid and Smallcap indices have lost over 8 percent each, respectively. This downturn has been driven by weak corporate earnings, persistent foreign outflows, and uncertain outlook, eroding investor confidence.

Mandar Bhojane, Senior Research Analyst at Choice Broking said Nifty is currently trading in a sideways to bearish trend, near the lower support of a falling wedge pattern on the daily chart. The index is at a critical level, where a decisive close below 22,550 could trigger further downside toward 22,400 and 22,200.

For Nifty 50 index, 22,800 remains a key resistance, and only a sustained breakout above this level may attract fresh buying interest, leading to a possible short-term recovery. The broader trend remains weak, with sellers maintaining control over price action, Bhojane said.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.