Sensex near all-time high: Does the rally have any more steam?

BSE Sensex, the Indian benchmark index, inched close to record high levels (30,000) the past week after the incumbent BJP government emerged victorious in the largest state election of 2017. That Prime Minister Narendra Modi will secure a second term in 2019 now seems like a foregone conclusion, especially on the backdrop of this emphatic win.

Investors and traders cheered the as-is and anticipated political stability by pushing the benchmark indices close to the record high levels last seen in March 2015.

New High Low Index

New High Low Index (NHLI), as the name suggests, takes into account the number of stocks touching new yearly highs and lows on a trading day on BSE. The formula used for calculation the same is:

New High Low Index =  Number of stocks touching new highs / (Number of stocks touching new highs + new lows)

After back-testing data since 2006, every time the Sensex makes a peak after a strong bull rally, the NHLI level surges to over 80% level for few days. Furthermore, the number of stocks hitting new yearly highs are more than 250 stocks on an average.

In the current rally, the NHLI is sub-70%. As seen in the diagram below, the NHLI is trending downwards in the ongoing rally while the BSE Sensex is trending upwards close to record levels. Additionally, the number of stocks hitting fresh 52-week highs has barely surpassed 150 in this entire rally. The technicals, hence, suggest that the much spoken-about market euphoria is still missing from the market. But this is a positive for traders and investors, as the market hasn’t peaked just yet and still has some cylinders to fire.

BSE Sensex vs New High Low Index

Advance-decline ratio

The breadth of a market, or its advance-decline ratio (ADR), is one of the best indicators used to measure the strength of a bull or bear rally. The ratio measures the total number of stocks advancing to the total number of stocks declining in the market.

In a bull market, when the Sensex is close to its peak, the ADR is above 2.5. However, in the current rally, the ADR is struggling to stay above 1.

Both these data points signal that retail participation is significantly missing from the market. When retail investors invest heavily in the market, putting all their money in stocks expecting it to touch new highs daily, it is a signal that the market is likely to peak out. Currently, the general mood among retail investors is that of caution and they continue to wait on the sidelines awaiting a significant correction to enter the market.

-Riken Mehta


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