An important parameter often used togauge the mood of the market is market breadth. Market breadth simply refers to the ratio of number of companies advancing relative to the number declining. Consider a scenario where the Sensex is up on a certain day. We must remember that this represents just 30 stocks. If the market breadth on that day is also positive ie. the number of companies advancing exceeds the number declining, then we can conclude that there has been a broad market participation in the rally. The extent of the advance – decline ratio also gives a good indication. So, if the advance - decline ratio is 4:1, it is obviously superior to 2:1, indicating a more bullish sentiment.
The market breadth can sometimes expose what’s not that obvious. I have seen times when the Sensex is up for the day but breadth is negative. It is these signals that indicate that we could be in sticky territory. This would typically mean that the mood across the market is not positive. Another way to interpret this would be that people are averse to putting their money in the lesser value stocks but would rather put their money in large cap stocks of the Sensex. In times of uncertainty, money often moves towards blue chip large cap stocks rather than mid or small cap stocks. Conversely, a positive breadth indicates general optimism in the markets and a sense of bullishness. On a given day, if both the Sensex and market breadth are positive, it would indicate a secular and consistent uptrend for that day. Hence, we must always keep an alert for these unspoken and often neglected signals that could tell an important tale about market direction.
Another important parameter is market turnover. This indicates the total value of delivery based as well as F&O (futures and options) transactions carried out during a day. Markets follow a certain average range of daily turnover. For instance, on a typical day the market turnover would be around 1.5 lakh crore. Now, how do we interpret this parameter? Turnover indicates conviction in the market. The higher the turnover, the greater the conviction. Hence, if the Sensex goes up on a given day with above average turnover, that indicates a great bullish trend. However, if the Sensex ends up positive on low volumes (another colloquial term for turnover), that indicates a lack of conviction which means the market rise could be on a sticky wicket and may not be sustainable.
Hence, to conclude, stock market analysis requires patient observation of several different parameters. Market breadth and turnover tend to be relatively hidden but they can also tell a tale. I will touch upon many more such parameters in subsequent posts.
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