Sentiment on D-Street most bearish since Covid

Mumbai: The sentiment among stock investors is most bearish since March 2020 – the previous market crash at the onset of Covid. The Advance Decline Ratio, widely used to gauge investor sentiment and market strength, in February was at 0.72 – the lowest reading in five years.

A declining ADR means more stocks are falling as against the gainers and points to a weakening market. In January, the reading was 0.9, while in the period before October – when the market started declining, it was in the range of 1 to 1.28 on average.

“The declining ADR indicates that the markets have been quite bearish due to a lack of buying interest, where the retail investors are shying away from buying and the foreign investors are engaged in persistent aggressive selling,” said Naveen Kulkarni, CIO, Axis Securities.

While markets fell in January as well, the fears on account of Trump trade tariffs took their full form in February, he added. “The markets were excessively bullish prior to the declines last year, and the negative sentiment is also in excess in a similar vein,” he said.

Benchmark indices – Sensex and Nifty – are down around 15% each from the peaks made on September 27, triggered by a rebound in Chinese equities, stronger dollar and weakening domestic corporate earnings, prompting record foreign selling.

The risk-off sentiment in the broader market has been more severe with the Mid-cap 150 index tumbling 20.3%, Small-Cap 250 index plunging 24.4% and the Micro-cap 250 dropping 23.8% in this period.Foreign investors have dumped shares worth over ₹2.81 lakh crore since the sell-off began in October last year, out of which, around ₹1.3 lakh crore worth of selling took place this year.”The markets have been declining for five consecutive months now and the trend remains weak due to lack of any domestic or global positive triggers,” said Harsha Upadhyaya, CIO, Kotak Mahindra AMC.

Money managers are mixed on whether the valuations are reasonable, after the near one-way market decline since October.

Kulkarni said that the valuations have turned reasonable in the broader market and the large caps have become cheaper.

“The markets are expected to be at the tail end of the sell off and once there is a palpable improvement in earnings, a revival is expected, said Kulkarni. “It is tough to catch the bottom but given that March is also expected to be a positive month seasonally, the selling could see a halt.”

Other fund managers said that while earnings are expected to recover in the next few quarters, the valuations in mid-cap and small-cap stocks remain expensive.

“Despite the steep corrections, the valuations remain rich in the mid-cap and small-cap segment and the earnings deceleration was also more severe in this segment,” said Upadhyaya. “The adjusted valuation on large-cap stocks is a better bet for long time investors.”

Some analysts consider extreme readings of Advance Decline Ratio as a contrarian indicator.

“The ADR in February is at the same level as March 2020, which indicates extremely oversold markets owing to extremely negative investor sentiment, which are close to a reversal in the short term that could sustain at least for a couple of months,” said Rohit Srivastava, founder, indiacharts.com.

The reversal would need to be confirmed with positive breadth and price up move, he said. “If Nifty moves over 22,500 levels it is likely to be confirmed”. The index ended at 22,082.65 on Tuesday.

While a pullback is possible, it is not expected to be a sustained one in the absence of triggers.

“While the falling ADR points to oversold markets, nothing exciting is anticipated in the short-term,” said Upadhyaya.