The 50-stock index may have entered an overbought territory, they said, sounding alarm bells for bulls clamouring for new highs.
On Thursday – as Nifty closed flat at 18,343 – 86% of the index constituents were trading above their 200-day exponential moving average (EMA), a key long-term price trend.
In comparison, about 63% of Nifty 200 stocks and nearly 57% of Nifty 500 are above their 200-day EMA, indicating lack of activity in the broader markets. Hence, the recent optimism in the market appears rather lopsided, experts said.
Mid-September, when Nifty 50 surpassed the 18,000 levels, 80% of the stocks traded above their 200-day EMA, setting the stage for the index to test new highs. At that point, 70% of Nifty 200 as well as Nifty 500 traded above their 200-day EMA.
However, as the US Fed delivered its third straight 75 basis point hike in interest rates in the second half of September, which gave a boost to safe haven assets like the US dollar, Nifty came crashing 7% in a risk-off environment.
“The breadth numbers for Nifty 50 suggests that it is entering an overbought zone,” said Viraj Vyas, derivatives and technical analyst – institutional equities, Ashika Group. “Broader markets refusing to participate in the last few sessions can be seen from the growing disparity in breadth data.”
The drop in India VIX – a measure of the market’s anticipation of price fluctuations in the near-term- to 15 is adding to the nervousness, Vyas said.
“The India VIX is also around the lowest point that we have seen this year which points to complacency in the market. Generally, such a divergence translates in a near term correction which takes out the late entrants,” he said.
The VIX touched a high of 33.97 in March this year – when the US Fed increased the key lending rates for the first time.
Nifty’s recent rally has been fuelled by resumption in foreign buying in index heavyweights such as banks, financials, and technology stocks. Shares of India’s largest mortgage lender
and private sector lender have risen nearly 15% each in the last one month. Shares of technology services firms like and have advanced 8-10% during the same period.
However, Nifty is facing resistance around 18,400-18,450, and sustaining above these levels could push the index to new highs, analysts said. The record level for Nifty 50 is 18,604.45 (October 19, 2021).
“The (recent) upbeat momentum has been governed by inflows of foreign investors, who typically focus on investing in top 100 stocks,” said Deepak Jasani, head, retail research, at HDFC Securities.
“It is likely the recent rally in large caps may run out of steam in a couple of weeks as the year-end holiday season gets closer. For the broader markets to go higher, one would need the large caps to continue their upward trajectory through the next month and continuing into 2023,” he said.
Foreign investors had sold Indian shares worth 23,285 crore in the second-half of September that led to the sharp fall in Nifty. Since the start of October, overseas funds have featured net buyers to the tune of 34,167 crore, as per data from stock exchanges.
In this time, as Nifty surged nearly 10%, the broader markets in the form of CNX Mid-cap and Small-cap indices have gained just about 3-4%.
“If you look at the trend, large caps and bigger mid-cap stocks have given almost similar returns and performed well in the recent up move,” Jasani said.