Nifty 500 Breadth Weakens

In life, we have the saying, "Make hay while the sun shines," suggesting that we take advantage of something while conditions are favorable because we don't know when those conditions will end or when they will be favorable again. In markets, it's similar in that we want to be our most aggressive when the majority of the evidence is pointing in one direction or another.

Since March, we've taken advantage of clear tactical trends in many of the major indexes and leading sectors like financial services, IT, fast moving consumer goods and energy. However, over the past month, we've pointed to several bearish data points like small-cap under-performanceNifty financial services weakness and island reversals at key levels that were contributing and continue to contribute to weakness in the major indexes.

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With that said, we're finally seeing this move lower confirmed by an expansion of new 52-week lows in the Nifty 500.

Performance of Nifty 500 Index and percentage of stocks reaching 52-week lows

Additionally, we're seeing an expansion of the number of stocks in the index with momentum in a bearish range.

Performance of Nifty 500 Index and percentage of stocks oversold

The Nifty 500 gives us a broad measure of how the universe of stocks we track is doing, but the extent of the breadth deterioration varies across the the large, mid, and small-cap Nifty indexes, with the latter seeing the largest expansion in stocks with these bearish characteristics. These readings, along with the other factors we've discussed here on the blog, suggest that this is not the time to be super aggressive in our portfolios, but instead, we should be exercising patience to see where these indexes find their footing and if/when we see any divergences that may mark a tradable bottom.

There are still opportunities on both the long and short side, many of which we outlined in the Members-Only Conference Call and others that can be found in the updated Chartbooks, but it's important to recognize that conditions over the short and even intermediate term are less favorable than they once were. By allowing the market to work itself out and monitoring the data as it comes in, we can be ready to take advantage of the many reward/risk scenarios that will ultimately come out of this.

Thanks for reading, and please let us know if you have any questions.

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