BSE Sensex at new highs: What are market internals suggesting?

Riken Mehta
moneycontrol.com

Follow me on Twitter @mehtariken

Indian stocks are trading at all-time high levels in anticipation of GDP growth picking up and that corporate earnings may have bottomed out. Can this rally sustain? Let us look at key indicators if there is still steam left.

Breadth of the market

The breadth of the market is one of the indicators used to gauge the strength of the rally. Advance Decline ratio measures the number of stocks advancing to the number of stocks declining in the market. As seen from the chart the advance-decline ratio is rising with the rally in Sensex which is a good sign. Traders should look for any divergence in the pattern with respect to Sensex movement in future which may suggest that the market is likely to  peak out.

Chart: Sensex (Left Axis), Advance Decline Ratio (ADR)  (Right Axis)



























New High Low Index

New High Low Index takes into account the number of stocks touching new yearly highs and lows on a trading day. The rising index along with the uptrend in Sensex suggests a powerful rally. The index is moving higher as Sensex scales new high signaling more stocks are hitting new 52-week highs with a broader participation of stocks in the market.



New High Low Index =         Number of stocks touching new highs                                                                                                                (Number of stocks touching new highs + new lows) 
 

 Chart: Sensex (Left Axis), New High Low Index  (Right Axis)

Sentiment Index

Sentiment suggests the mood of the traders and investors in the market. There are two groups of people in the market- Informed and uninformed investors (retail investors).  Informed investors invest when market is trading at lower levels, sentiment is pessimistic and uniformed investors are bearish on the market and opt to invest in fixed deposits. When retail investors invest heavily in the market putting all the money in stocks and expect the market to touch new highs every day is a signal that market is likely to peak out. Unfortunately, no public data is available to measure Sentiment index but the general mood is retail investors are currently still cautious and not invested heavily in the market so far. Another good sign!