Stock market breadth signals consolidation; long-term outlook positive

The average lead-to-fall ratio, which compares the number of stocks that rose to the number of shares that fell, hit a 4-month low in July, indicating a period of market consolidation following a strong rally. .
Up to this point of July, the increase/decrease ratio stood at 1.05 times. In June, the ratio was 1.14, compared with 1.08 times in May.
The ratio peaked at 1.41 times in April – a level last seen since May 2021. Since then, it has begun to decline but has remained above 1 for the fourth consecutive month, which analysts say the market has maintained bullish sentiment in the long term. , analysts said. The long-term optimism stems from a multi-year economic growth cycle and expectations of healthy growth in corporate earnings over the next few years, analysts added. “The downtrend in the up/down ratio could be a sign that the market is losing momentum. However, after such a strong rally, it would be good for the market to absorb recent gains and consolidate around current levels,” said Gaurav Dua, Senior Vice President and Head of Market Strategy. capital at Sharekhan of BNP Paribas said. . He expects a 5-8% drop from current levels.
India’s leading indices – Sensex and Nifty – have gained more than 16% each in the past four months, while the BSE MidCap and BSE SmallCap indexes are up more than 28% each. It’s not cheap anymore

Sensex and Nifty are currently trading at a valuation of between 19.5 and 20 times one-year forward earnings, representing a premium of more than 10% of their average long-term valuation. Analysts have suggested that at these levels, the two indices are no longer considered cheap or undervalued.
However, analysts say investors have an optimistic outlook on the Indian market in the long term. However, they also predict high short-term volatility. During this period, there may be cases where investors make profits in certain pockets of the market. Rajesh Kumar Jain, Managing Partner and Chief Business Officer of Individual Clients at Anand Rathi Group said: “The quarterly results have started to be announced and as such, the market will benefit from the announcements. earnings and management guidance for the next quarter and into the future. “Among the current categories, choose promising names in the banking, automotive, consumer packaged goods and real estate sectors.”

Contrary to the typical euphoria seen in new highs, investors are currently on a cautious tone, according to analysts.
“This cautious sentiment suggests that there is some idle liquidity on the sidelines as investors wait for better prices to enter the market. This idle liquidity is likely to strongly support the market in the event of a price. reduced or empty,” added Mr. Dua. .