Record advance-decline ratio for April but experts see no reason to rejoice, just yet! Here’s why

April has been kind to the equity markets. Key indices notched historic highs with the Nifty 50 coming within a stone’s throw of the 23,000 mark and the Sensex conquering the 75,000 peak. As a result, BSE advance-decline ratio showed record momentum for the period April 1-12. The advance-decline ratio for the period stood at 1.31, which is a stark improvement compared to March 2024, when this ratio fell to 0.83.

But since April 12, things have taken a u-turn as market breadth deteriorated, with Dalal Street clocking a third straight day of weakness. The market breadth on April 15, when the Sensex saw an 850-point meltdown led by geopolitical jitters, was a dismal 1:4. So does this data really signal extreme bullishness ahead or is it a bit too soon to rejoice?

Siddarth Bhamre, Head of Institutional Research, Asit C Mehta Broking attributes the marked improvement in market breadth for April 1-12 period  to the rebound in mid-cap stocks from the SEBI diktat-induced selloff in March. The BSE midcap index is up over 2.35 percent in the period April 1-12 vis-a-vis the 0.6 percent drop for March. The BSE Smallcap index, on the other hand, has rallied over 6.27 percent in the same period after a 4.07 percent drop in March.

“So both the indices have staged a good recovery, and therefore we saw a subsequent improvement in market breadth as well. So, this is more of a reactive trend. But going forward, a lot will depend on how the geopolitical crisis in West Asia unfolds. Although the Israel-Iran situation may not see a big escalation, to take this as a signal of extreme bullishness will be a bit too premature,” says Bhamre.

Gautam Shah, Founder of Goldilocks Premium Research too feels that studies on market breadth have shown a divergence all along. Speaking to Moneycontrol, he said, “We have had instances where the indices made a new high but the breadth did not. So it’s not as rosy as it might seem”.

Ashish Kyal, CMT, Founder and CEO of Waves Strategy Advisors too feels that this should not be misinterpreted as a sign of extreme bullishness as, in the last few sessions, there has been a deterioration in breadth. “Since the indicator was extremely overbought, a sudden change in geopolitical scenario took many traders by surprise, trapping them at higher levels".

Nilesh Jain, Head AVP-Derivative and Technical Research at Centrum Broking feels that although the April market breadth data shows optimism, it would be crucial to monitor whether the trend sustains for the rest of the month.

He says, “A ratio of 1.51 suggests that traders and investors are optimistic and that the market is moving strongly. Nevertheless, the information is limited to April's first 12 days. Even if it's encouraging, it's crucial to see if this pattern continues for the duration of the month or longer. A consistent rise in the advance-decline ratio over a longer time frame would strengthen the case for substantial momentum because short-term swings can happen”.

However, he cautions, “Even with the encouraging indicators, it's critical to exercise caution and take into account the risks associated with geopolitical instability. Also watch out for corporate earnings”.

Meanwhile, Shrikant Chouhan, Head Equity Research, Kotak Securities says, “After the end of the fiscal year, there was a surge in buying interest in the market. The buying was particularly observed in the broader market, which is a common trend at the start of a new fiscal year. However, the unexpected rise in inflation in the US and sudden geopolitical developments have negatively affected the market sentiment. The outcomes of these events are highly uncertain, and traders tend to react by liquidating their positions at each breach of the support level.”

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