Percentage of stocks trading below 200-DMA now highest in India

MUMBAI: Almost 60% of the stocks that constitute the Nifty, the bellwether equity benchmark, are trading below their daily moving average (DMA) for the past 200 days. The last time this happened was in February 2014. In fact, among the world’s top 10 equity markets (in terms of market capitalisation), there is no other market where as many index stocks are quoting below their respective 200-DMAs.

The ‘200-DMA’ is considered as an important support level for an index or a stock by active traders as well as institutional investors. For other major equity indices like Dow Jones, FTSE, CAC 40 and DAX, the percentages of stocks trading below their respective 200-DMA are 40%, 24%, 12% and 13%, respectively. In China, which has been the best performer among major markets since January, all index stocks are trading above their respective 200-DMAs. When an index or majority of the stocks in an index slip below their 200-DMA, it indicates underlying bearish trends (and vice versa). This support level greatly infl uences strategies of high-frequency traders. High-frequency traders may double or triple their bets if the 200-DMA level is breached as they follow a ‘pyramid’ investment strategy – which means stakes multiply the further index or a stock drifts from their 200-DMA.

On an average, about 23% of Nifty constituents have been trading below their 200-DMAs since the beginning of 2014. The Nifty, too, is trading 5% below its 200-DMA of 8,351.

In recent months, some of the foreign funds and brokers have questioned the relative attractiveness of Indian equities as earnings growth, return on equity, margin expansion and pace of capital expenditure have been slower than what was expected a year ago. Now, with many key stocks trading below their 200-DMAs, this technical parameter would be closely tracked.