Over 90% stocks in Nifty 500, midcap, smallcap trading above 200 DMA
According to data from Bloomberg, more than 90% of the stocks listed in Nifty 500, Nifty MidCap 100, and Nifty SmallCap 100 are currently trading above their 200-day moving average (DMA). Analysts suggest that this high percentage could be an indication that these stocks are approaching an overbought condition.
Presently, approximately 452, or 90%, of the companies in Nifty 500, around 95 companies in Nifty MidCap 100, and 90 firms in Nifty SmallCap 100 have their stock prices trading above the 200 DMA. The 200-DMA is a crucial tool in technical analysis as it represents the average closing price of a stock over the preceding 200 days. This metric is valuable for evaluating a stock’s momentum concerning its current market price.
Devarsh Vakil, Deputy Head of Retail Research at HDFC Securities, has noted that the current market dynamics are signaling a broad-based rally across various sectors. This suggests the presence of a structural bull market, rather than a bubble confined to a few concentrated sectors, as was the case during the technology, media, and telecommunications (TMT) boom of 1998-2000.
However, Vakil has raised a cautionary flag for bullish investors due to the large number of stocks trading above their 200-day moving average (DMA) levels. Such a phenomenon often prompts investors to exercise caution and consider the possibility of an overbought market.
In August 2023, the midcap and smallcap segments outperformed largecaps, driven by increased buying in sectors such as media and consumer durables. The entertainment industry, fueled by Bollywood blockbusters, saw a surge in movie exhibition and television stocks. Additionally, sectors like sugar, chemicals, defense, PSU Banking, paper, power, and fertilizers showed promise and attracted investor interest.
Notably, several midcap stocks, including IRFC, BHEL, JSW Energy, Adani Power, Gland Pharma, GMR Airports, Trent, Bharat Forge, and Supreme Industries, experienced gains of over 20 percent during this period. Investors also displayed heightened interest in the public sector (PSU) and power sectors, as identified by analysts.
Overall, the market appears to be exhibiting diverse trends and sectors, with midcaps and smallcaps showing strength, potentially indicating a more widespread and sustainable market rally. However, the elevated number of stocks trading above their 200 DMA levels serves as a reminder for investors to exercise caution and conduct thorough research before making investment decisions.
In the past year, the performance of stocks within various market segments has exhibited noteworthy trends. Within the Nifty 500 universe, 33 stocks managed to deliver impressive returns exceeding 100 percent. Additionally, 22 stocks in this universe yielded returns ranging from 70 to 100 percent. In the Nifty MidCap 100 segment, eight companies experienced substantial gains, surpassing the 100 percent return mark, while five companies generated returns within the range of 70 to 100 percent.
In contrast, the Nifty SmallCap 100 segment witnessed 14 companies achieving returns of over 100 percent, with nine companies providing returns between 70 and 100 percent. These performance figures indicate a diverse range of opportunities and outcomes within different market segments.
Market observers and analysts are now anticipating a potential style and sector rotation. Despite the recent strong performance by midcap and smallcap stocks over the past couple of months, some experts believe that their margin of safety at current levels has diminished in comparison to largecaps. Consequently, it is expected that the broader market may undergo a period of time correction in the near term, with investor flows potentially shifting toward largecaps. Nevertheless, the long-term attractiveness of the broader market remains intact.
Looking ahead, the financial markets may experience interim bouts of volatility, particularly as the upcoming state and parliamentary elections next year and the policy stance adopted by central bankers come into play. These factors can influence market sentiment and investor behavior, contributing to fluctuations in stock prices and overall market dynamics. Investors should remain vigilant and adapt their strategies accordingly in response to changing market conditions.
Devarsh Vakil recommends that investors take measures to reduce risk in their portfolios by decreasing exposure to lower quality and high-beta midcap and smallcap stocks. Instead, he suggests redirecting investments toward higher quality and larger stocks, which are generally considered to have more stability and resilience in times of market uncertainty.
Rajesh Palviya, an analyst at Axis Securities, provides further insight into the market dynamics. He notes that there has been a recent price and time correction in the market, with the index experiencing a decline from 19,867 to 19,200 levels in August. During this period, the price action formed a bearish candle, indicating a lower high and lower low pattern compared to the previous month. This pattern signifies caution or negativity in market sentiment at that time.
However, Palviya emphasizes that the index remains in a robust medium- to long-term uptrend, and these smaller corrections are viewed as opportunities for buying and accumulation. In the near term, he suggests that any correction toward the 19,000-18,800 levels should be seen as buying opportunities. There is potential for the index to extend its rally and reach levels around 19,800-20,000. Palviya maintains a positive bias and anticipates the possibility of a sector rotation within the ongoing bull market.
Overall, the advice from these analysts suggests a cautious approach, reducing risk in the short term by favoring higher quality and larger stocks while also recognizing the potential for continued upward momentum in the medium to long term, with opportunities for buying during corrections.
