The ratio for all BSE stocks has fallen to a monthly average of 0.83 in March, the lowest since the same period a year ago. A declining ADR means more stocks are falling as against the gainers.
The ADR has declined at a time when the Sensex crossed 74,000 for the first time recently and the Nifty too hit an all-time high. This is because Sensex and Nifty comprise large-cap stocks, which have largely remained strong.
“A declining ADR indicates that the money is being withdrawn from the markets, as seen with the profit booking in small- and mid-caps post the extreme run-up,” said Abhilash Pagaria, head of alternative & quantitative research, Nuvama. “The heavyweight stocks have been inching higher while there is weakness in the broader markets.”
The divergence in firming benchmark indices and falling ADR points to investors shifting money from mid-caps and small-caps, which are considered expensive after the recent run-up, to large-caps.
Analysts said the market conditions are tricky.”Usually, consolidation in the market is characterized by bottoming out of ADR. However this time, the ratio is at the bottom end while markets are rising,” said Rohit Srivastava, founder, indiacharts.com. “Nifty has not come off its high levels despite sectors undergoing corrections due to sector rotation.”BSE’s Midcap 150 and Smallcap 250 indices had rallied since December. In the last 6 months, the indices have moved up 19% and 18 %, respectively. In the past one month, however, the indices have corrected 1% and 3%, respectively.
“The divergence between ADR and markets can be attributed to the cautious sentiment,” said Rajesh Palviya, senior vice president research – technical and derivatives at Axis Securities. “These investors are waiting for a cool off in the segment which is not happening.” Palviya said the Sebi’s recent warning to the mutual fund industry of froth in mid-cap and small-cap stocks has contributed to investor caution.
“The stocks that were earlier outperforming are now witnessing profit taking,” said Pagaria. “There could be a reversal in trend where large caps outperform the small- and mid-caps due to rotation in the markets.”
“One of two things is likely to happen; all the stocks fall together,” said Srivastava. “Or there is a rally in other sectors such as IT and FMCG while other sectors witness correction, leading to extended sector rotation.”
The last time there was a similar divergence was in June-August 2021, when sector rotation continued and subsequently led to Sensex and Nifty rallying to new highs that went on till the end of October, said Srivastava.
It may be too early to get bearish based on the weakening ADR readings.
“There is no bearish signal from the ADR since overall flows are strong in mutual funds and there have been significant declines yet,” said Pagaria. “While volatility can be expected, no steep corrections are likely.”
If the Nifty crosses 22,630 levels, it can rally even further, said Srivastava. The index closed at 22,494 on Thursday. “However, as of now it is at resistance level, and this may be an inflection point of sorts,” he said.
