A key gauge hints at extreme bearishness

Mumbai: Trend indicators are pointing to extreme bearishness in the stock market after the recent sell-off. Out of the country's 500 top stocks on the BSE, 86% are trading below their 200-Day Moving Average (DMA) - a measure used by market participants to determine the long-term trend in a stock or an index. When a stock or an index trades below its 200-DMA, it is said to be in a bearish trend and vice versa, but extreme readings are also seen as contrarian indicators.

Out of the BSE-500 index, Solara Active, Dilip Buildcon, Indiabulls Real, Hikal, Indiabulls Housing, Brightcom Group, Metropolis Healthcare, Jindal Stainless, RBL Bank, and Dishman Carbogen are 48-68% away from their 200-DMAs. This means pessimism in these stocks is high. Stocks in the financial sector are furthest away from their 200-DMAs.

Analysts said when 86% of the stocks are away from their 200-DMAs, it is considered a contrarian indicator.

"When nearly 90% of the stocks are below 200-DMAs, this kind of a reading usually means there could be a rebound," said Rohit Srivastava, founder, Indiacharts.com. "From a one-to-three week perspective we are expecting a rebound, where the Nifty could go to 16,000 or higher. If that sustains then 16,900 is possible."

But, in a bear market such as the current one, the contrarian signal may not work. With foreign selling of Indian stocks continuing unabated amid a weakening rupee, analysts said market recoveries tend to be short-lived due to selling at higher levels.

"I'm expecting this rally to fizzle out sooner or later after stretching to 15,600-15,700," said Sriram Velayudhan, vice president-alternative research at IIFL.

"Percentage of FPI shorts out of the long and short index futures open interest of FPIs is close to 80% and they know the risk the current environment carries."

He said it will be critical for the Nifty to cross 16,000 for the rebound the sustain.

"Most of the indicators point to a state of caution. Till 16,900 is taken out, we won't be out of the woods," said Velayudhan.