A key technical stock market indicator is signaling a protracted gloom for Indian equities, reviving memories of a similar downtrend two years ago. Benchmark share indices Sensex and Nifty as well as broader indices such as the BSE-200 are trading below their 200-day moving average, or 200-DMA, an indication that Indian markets are in bear territory.
A decline below 200-DMA means that new buyers of indices or stocks are not willing to pay more than the average price of the previous 200 days. While Sensex and Nifty are about 6% below their 200-DMA, more than 75% stocks on the BSE-200 are below the mark, a technical sign of pessimism.
The downswing in equities market is also evident in Asian peers such as China's Shanghai Composite and Singapore's Straits Times that are trading below this mark, analysts said. The classic definition of a bear market is when key indices fall 20% below their peaks, though the 200-DMA gauge is also widely used.
"We are clearly in a bear market at the moment," said Alex Mathews, head-research, Geojit BNP Paribas Financial Services . "Charts are pointing to a downtrend and a reversal looks difficult unless there are positive cues," he said.
The Indian markets last experienced a similar trend in March 2009 when shares were reeling under the impact of a global financial meltdown, and almost 78% stocks on the BSE-200 were below 200-DMA, Enam Securities said in a report. The difference between the two periods is that the Sensex is at about 18,000 now, almost 12% below peak, while it was nearing 8,000 in early March 2009.
Liquidity Remains Global Concern
Foreign funds have dumped Indian shares, pulling down the markets in recent weeks as stubborn price pressures and the central bank's aggressive monetary tightening threaten to hurt growth and dent corporate profits. Overseas investors have net sold Indian stocks worth Rs 8,200 crore so far in May, dragging down benchmark indices 5%. They have pulled out almost Rs 3,500 crore on a net basis so far this year, after investing about Rs 1.33 lakh crore in 2010.
Liquidity remains a concern globally and investors will closely watch the foreign flow trend post-June, when the Federal Reserve's bond purchase, or the second round of quantitative easing, comes to an end, analysts said. Overseas markets have been jittery over the closing of the bond buyback that pumped billions of dollars into global stocks and commodities in the last couple of years. Though there is consensus in the market that the undertone may remain weak, any sharp decline from current levels may take investors and traders by surprise, analysts said.
"Monthly and quarterly charts are showing bearish trends. While there may be a brief upmove to about 5,550 levels over the next couple of weeks, the trend over the next two months shows the Nifty is likely to fall 15% to around 4,500 levels," said Sandeep Wagle, managing director, Aptart Technical Advisors.
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