The fact that the magnitude of this rally is restricted is a worrying sign, as market may be stretching beyond fundamentals
A larger number of stocks had participated in earlier market rallies compared to the current one, according to market observers
A rising tide tends to lift all boats. But not in the current rally going on in the Indian stock markets. While the bellwether Sensex achieved a new high on 28 November, a large number of stocks hit their 52-week lows. Over 300 stocks were within 5% distance from their 52-week lows. This is nearly three times the number of stocks (120) that were near their 52-week highs.
Out of 2,620 traded stocks on BSE, more than 22% were quoting about 10% higher compared to their 52-week lows. This is more than twice the number of companies trading at their 52-week highs.
While the phenomenon seems peculiar, a large number of stocks were hitting new lows even in early 2008, when the Sensex and Nifty were touching new peaks. From the looks of it, corrections begin with relatively smaller stocks.
“This shakeout can continue for another two years and many companies will fall by the way side. Investors will continue to correct their over exposure to smaller companies to larger ones. Only a very small percentage of companies in the small caps space will survive in the long run given the disruption seen across businesses," said Deepak Jasani, head of retail research at HDFC Securities Ltd.
Going by the way the market seems to be switching to larger and better-run companies, it seems like this trend of more stocks hitting 52-week lows could continue for now. “Investors, especially institutions, could continue to move into the better names for some more some time, but if this gets overdone, the pendulum may shift back and large-caps may see higher derating from those levels. At some point in the future, value in mid-caps will emerge," added Jasani.
A larger number of stocks had participated in earlier market rallies compared to the current one, according to market observers. In fact, this is not considered an all-round rally. The fact that the magnitude of this rally is restricted is a worrying sign, as the market may be stretching way beyond the fundamentals.
Besides, this rally is not being supported by a broad-based increase in earnings. Also, only eight of the 30 Sensex companies have gained more than 20% year to date. It only shows how narrow this rally has been.