After making a bottom in June, the mood of the market has significantly changed in the last month and a half, and pushed the benchmark indices to a more than three-month high. A rally of about 14 percent in the market may indicate that the concerns of the past few months seem to have abated.
A slowing US economy got the Federal Reserve to soften its commentary at its July policy meeting, and global markets heaved a sigh of relief. In India, foreign institutional investors (FIIs) turned buyers after a long period of selling, with most corporate earnings either meeting analysts’ expectations or beating them, even as the Indian rupee came off its record lows and oil prices cooled, all of which gave legs to the rally.
After crossing the 200-day exponential moving average (16,520), the market moved back for a couple of days but got major strength on July 27 with the formation of a Bullish Engulfing pattern. Since then it has been in an uptrend and crossed the much awaited 200-day simple moving average (17,033) last week.
The Nifty50 has rallied 14 percent from June lows of 15,183 to 17,340 levels on August 1. With this recovery, the rally has also broadened with midcap and smallcaps participating.
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The Nifty Midcap 100 and Smallcap 100 indices have gained 20 percent and 19 percent, respectively. The breadth of stocks trading above the 200-day moving average (DMA) has also improved significantly to 43 percent as on August 1, which was far better than oversold levels of 14 percent seen in June.
As on August 1, total 216 stocks in the Nifty500 index traded above their 200 DMA including ABB India, Abbott India, ACC, Adani Enterprises, Adani Green Energy, Adani Ports, Adani Total Gas, Adani Transmission, Ambuja Cements, Angel One, Apollo Tyres, Ashok Leyland, Asian Paints, Avenue Supermarts, Axis Bank, Bajaj Auto, Bajaj Finance, Bank of Baroda, Bharat Electronics, Bharat Forge, Britannia Industries, Canara Bank, Cipla, Coal India, Colgate, Dabur India, DLF and Eicher Motors.
Engineers India, GAIL (India), Godrej Consumer Products, Havells India, Hero MotoCorp, Hindustan Unilever, ICICI Bank, ICICI Prudential Life Insurance, IndusInd Bank, ITC, Kotak Mahindra Bank, Larsen & Toubro, Mahindra & Mahindra, Marico, Maruti Suzuki India, Navin Fluorine International, Nestle India, NTPC and Pidilite Industries also crossed their 200 DMA.
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Among others, Power Grid, PVR, Reliance Industries, SBI Card, SBI Life, Schaeffler India, Siemens, State Bank of India, Sun Pharma, Tata Chemicals, Tata Consumer Products, Tata Motors, Thermax, Titan, Trent, Tube Investments of India, TVS Motor, UPL, Varun Beverages, VIP Industries and Whirlpool of India, too, were above their 200 DMA.
If we go through the above list, most Tata group and Adani group stocks are already above their 200 DMA. Stocks from the FMCG, auto, infra, and banking and financial services segments also featured in the list. In fact, most of these stocks were the actual drivers of the recent rally.
Generally, the percentage of stocks trading above a specific moving average is a breadth indicator that measures internal strength or weakness in the underlying index.
Any improvement in breadth is always a good sign for the market. Once the stocks move above a specific moving average, the breadth improves.
“It indicates the internal strength of the broader market is improving. It’s an initial sign of a fresh bull run. The momentum of the broader market is getting stronger,” said Vidnyan Sawant, AVP, technical research, at GEPL Capital.
Once the count of stocks above a specific moving average crosses the 50 percent threshold (now it is 43 percent of Nifty500 stocks), then the sentiment turns more positive, indicating a bullish trend in the market.
“At present, the number of stocks above 200 DMA has reached 43 percent from 14 percent in June 2022 for NSE500, which is below the threshold level of 50 percent. A rising number is obviously a good sign but once we see this number reaching above 50 percent, confirmation of a long-term bullish trend would come for the markets,” said Vinay Rajani, senior technical and derivative analyst at HDFC Securities.
In June 2022, stocks above 200 DMA reached the oversold level of 14 percent for the NSE500. “The reason why we consider 14 percent as an oversold level is that, during the correction phase in 2011, 2013, 2015 and 2018, the market breadth bottomed out around 14 percent level and the trend turned bullish thereafter,” Rajani said.
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