Fears of a rate hike by US Federal Reserve and rupee depreciation make investors jittery

MUMBAI: The spectre of a prolonged weak spell is looming over Dalal Street. After running up sharply in the last one year, a key technical indicator is signalling a decline in appetite for Indian stocks of late. More than half of the 1,600-odd stocks traded on the National Stock Exchange (NSE) have slipped below their 200-day moving averages (DMAs), a sign of pessimism.

A fall below this technical level means a new buyer of the index or stock is willing to pay less than the average price paid in the last 200 consecutive days. (read ET in the classroom)

In January, about 20-25per cent of the stocks on NSE were below their 200-DMA. In October, about 15per cent, or around 215 stocks, were trading below their 200-DMA. “The falling 200-DMA trend indicates we are entering into a cautious zone,” said Sudip Bandyopadhyay, managing director & CEO, Destimoney Securities.




“There is huge nervousness in the market on fear of an interest rate hike in the US and rupee depreciation fuelled by the expensive valuations of Indian stocks which compelled investors to book profits.”

“The overall mood in Dalal Street is completely confused and investors do not know what to do next,” he added. The benchmark indices have fallen close to 4per cent from their highs early in March. The benchmark Nifty is currently trading 6per cent above its 200-DMA of 8,135. But, stocks such as Sesa Sterlite, Cairn, Tata Steel, Reliance Power, Bank of India, Oriental Bank and UCO Bank are currently trading 20per cent to 30per cent below their 200-DMA; while frontline stocks such as RIL, ONGC, Bajaj Auto, Gail and Punjab National Bank are trading below 10per cent to 20per cent of their 200-DMAs.

“Purely on technical lines, the 200-day moving average is perceived to be the dividing line between a stock that is technically healthy and one that is not,” said Anand James, head of technical research at Geojit BNP Paribas Financial Services. “Furthermore, the percentage of stocks above their 200-DMA helps determine the overall health of the market. Many traders also use moving averages to determine profitable entry and exit points into specific securities.”



Some technical analysts consider the fall of these stocks below the 200-DMA as the end of the bull phase for the moment. When the market was drifting lower in 2011-12, over 75per cent of the stocks were below their 200-DMAs. Another section of the market, however, don’t agree with the view that 200-DMA is pointing to a protracted gloom.

“While market-timing systems based on the 200-day moving average had impressive records two decades back, they have become markedly less successful now,” said Dharmesh Shah, technical analyst at ICICI Securities. “Currently, the market is digesting the sharp gains of the post-election rally last year and entering into a consolidation phase. In a way, this is good for the investors.”