Every second Nifty stock in firm bear grip, falling up to 42% from peaks. How long before the index buckles?

The sharp downturn witnessed over the past few months has created a scenario where, although the overall market is not officially in a bear grip, more and more pockets of the market are entering the red zone with each passing day. In the headline Nifty index, as many as 28 stocks declined over 20% from the highs, sitting firmly in red.

Leading auto stocks Hero MotoCorp, Bajaj Auto and Tata Motors are the worst losers since the slump began, falling up to 42%.

It should be noted that even though more than half the stocks are in bearish phase, Nifty is down about 16%, indicating the 50-stock cannot yet officially be termed as bear market. This is mainly due to the weightage of the stocks.

For instance, top eight stocks in the index including HDFC Bank, Reliance Industries, ICICI Bank, TCS and a few others make up for almost 50% of Nifty. Technically, a bear market is measured by a decline of 20% or more from recent highs in the headline index.

Stocks like RIL, HDFC Bank, ICICI Bank and TCS have been at the relatively lower end of the damage, when compared with other peers in the index.

The decline in equities is due to a multitude of factors. The strong bull run since the pandemic days meant that valuations have become quite stretched. This has been coupled with underwhelming few quarters of earnings, where the profits grew in mid single-digits.Also Read: Nifty PE multiple crashes below 20 for first time in 32 months. Is it cheap enough to buy?

Then there is also the selling pressure from the foreign investors, who pulled out over Rs 2 lakh crore from Indian markets over the last three months.

Minimal participation from the high-net-worth individuals (HNI) also weighed on Indian equities. Analysts note that HNIs shifted away from mid and smallcaps, seemingly booking profits accumulated over many years.

Further, ongoing news around new tariffs being levied on different countries kept the global undertone uncertain.

What should investors do?

Coming into March, the rollovers for Nifty was as high as 84%, indicating a continued bearish sentiment despite a significant slump in February.

A rollover refers to the process of closing an existing position in a near-month futures contract and simultaneously opening a similar position in a far-month contract. This is done to extend the exposure or hedge beyond the expiration of the current contract.

Nifty futures contracts expire on the last Thursday of every month. Traders who wish to continue their positions beyond the expiry date must “roll over” their positions to the next month’s contract. High rollovers with increasing open interest often indicate strong bullish or bearish sentiment, depending on the direction of the market.

Analysts do not expect a sharp recovery in March, as cash volumes show no signs of picking up, indicating weak buying interest. However, persistent FII selling is unlikely to ease soon, said Nuvama.

A consequential trend that could be seen recently is that the Nifty price-to-earnings (PE) multiple fell below 20 for the first time since the Russia-Ukraine war. During the peak late last year, the PE multiple was hovering around 24 levels.

“On the upside, 22,200 would be the immediate resistance zone for the bulls. If the market moves above 22,200, it could rally up to 22,250–22,300. On the flip side, if it falls below 22,000, traders may prefer to exit their long positions,” said Shrikant Chouhan, Head Equity Research, Kotak Securities.

Meanwhile, small and midcaps may face continued sectoral rotation and overall derating, especially where negative news emerges and valuations remain stretched.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)