Market riptide pulls ADR below 1, charting course of unease

The advance/decline ratio (ADR) — a gauge of market breadth — has remained negative (below 1) for a second consecutive month.

In other words, the number of stocks declining is outpacing those rising, as a brutal selloff by overseas investors and lofty valuations weigh on sentiment.

According to BSE data, the ADR for October stands at 0.98 for the second month in a row.

This marks the fifth month this year that the gauge has fallen below 1, even as the benchmark S&P BSE Sensex and the National Stock Exchange Nifty have risen close to 15 per cent year-to-date.

The last time the ADR was negative for two consecutive months was in February and March.

The muddled outlook regarding US rate cuts, the resurgence of Chinese markets, and lacklustre earnings from domestic firms are some of the reasons cited for weak market performance.

From their peaks at the end of September, both the benchmark Sensex and the Nifty have declined over 5 per cent.

Sectoral and thematic indices have seen even deeper cuts.

So far this month, foreign portfolio investors (FPIs) have withdrawn Rs 77,000 crore, or $9.2 billion, from domestic stocks — the highest outflow ever recorded in a calendar month.

“The rationale behind FPI selling is the elevated valuations in India and the cheaper valuations of Chinese stocks, which FPIs have been buying aggressively since mid-September,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

A large portion of the selling is due to investors reducing their India exposure to invest in the Chinese market, where valuations are compelling.

The quarterly results from several major companies, which have not met Street expectations, have raised questions about whether elevated valuations can still be justified.

Going forward, market experts believe that the remainder of the earnings season will determine whether market breadth improves.

“We expect consolidation to continue in the markets due to mixed global cues and a lack of domestic triggers.

"However, stock-specific action will be driven by quarterly earnings results,” said Siddhartha Khemka, head of research and wealth management at Motilal Oswal Financial Services.