Mera joota hai Japani
Ye patloon Englishstani
Sirpe lal topi Russi
Fir bhi dil hai Hindustani
Well, ever since Russia has thrown its red hat into the battlefield, stock markets have been losing their pants and hearts.
….and the list goes on.
But why participate in endless discussions on topics which are wide open to anybody’s guess at present? After all, most of us just want to know whether in the present market, it’s a good time to buy on dips or exit on rallies.
You see, stock market experts rarely agree with one another on the interpretation of market conditions and perhaps that’s the beauty of equity investing. Because market consensus often lead to extremes, and more often than not, signal reversals of the existing trends.
Hence, we decided to focus on two hardcore data indicators—advance-decline ratio of companies listed on BSE and the monthly performance of S&P BSE 500. To be sure that our data universe is large enough to draw meaningful conclusions, we considered the past 20 years’ of data.
Again, we don’t say these are the only indicators but when used in the right way, these two indicators can fairly tell you how strong the underlying market sentiment is.
But first of all, what is the advance-decline ratio?
Market breadth measured by the number of stocks advancing versus the number of stocks declining is a good indicator of the general disposition of investors.
In February 2022; the advance-decline ratio was 0.83.
BSE 500 fell 4.1% in February.
When you combine the findings of advance-decline ratio and monthly return data, you might be tempted to conclude that we are very close to the oversold territory.
We also compared the monthly return data of BSE 500 vis-à-vis its 10-month average at this juncture. We found that the closing of BSE 500 in February 2022 was a tad below its 10-month average.
Historically, the 10-month average has acted as a reasonably good support during bullish phases. Considering this anecdotal evidence, it appears that March could be a crucial month for the markets.
Will markets bounce back? We don’t know.
For years together, individual investors have typically been at the receiving end of market downturns, will it be different this time?
A bull might buy the dip while bear might sell a rally, but if you are investing in markets to accomplish your long term goals, you need not be a bull or a bear. You just need to be a disciplined investor.
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