As the equity market rallied close to a two-year high, the number of Nifty companies trading above 200 DMA (day moving average), a long-term trend indicator for a security, also touched a high since February 2012. However, the past instances indicate that at least 45 scrips (90% of the index stocks) need to surpass their respective benchmarks for a strong rally to converge into a bull market.
On Wednesday, as many as 40 companies managed to overtake this hurdle, after a 1.4% decline in the Nifty in the last two sessions this number has fallen. Currently, as many as 38 (76%) of leading 50 bluechip stocks are trading above this indicator.
Generally, a stock?s relative position to its 200 DMA indicates trader sentiment towards the stock; it is considered bullish if the stock quotes above its 200 DMA and bearish if it?s below this benchmark. Further, for an index like the Nifty a rise in number of its constituents trading above this indicator may precede the overall change in the market trend. For example, in February and mid-April 2009, over half the Nifty?s current constituents surpassed respective 200 DMAs, in turn pushing the Nifty closer to its own long-term average. While Nifty yielded 32% in this period, its gains were extended further for a year, as such constituents continued to increase in number.
Similarly between October 2010 and mid-January 2011, the decline in this number led the market plunge. The Nifty constituents which managed to stay above their 200 DMAs fell drastically from 96% to just half of total constituents.
Interestingly, while the percentage of Nifty constituents trading above this benchmark is in-line with that at the end of February, Nifty has been currently trading at nearly 300 points higher. This traders say point out that the breadth by which a stock has surpassed the indicator in turn pointing to the strength of gains made. For instance, since November, the incremental gains made by stocks like Axis bank, Bajaj Auto, Dr Reddy?s and Maruti Suzuki have pushed these stocks significantly above their long-term indicators.
As a result, most are trading at 15% to 20% premium to their 200 DMAs. Even Cipla, HDFC, BoB, ICICI, JP Associates and M&M are trading at such premiums.
On other hand, Cairn Infosys, NTPC and Siemens continue to trail their 200 DMAs while metal stocks managed to overtake this gauge in the last week after strong advances. Traders also point out that lately, the indicator has worked brilliantly in case of certain stocks like Tata Motors and TCS that have taken a respite at their 200 DMA during recent corrections.