Market is haemorrhaging, but Sensex & Nifty seem to suggest rude health

The big indices have retreated just 5-6 percent from their peaks, but the price damage in mid and small cap shares has been severe.

  

Many investors would be surprised to see the erosion in their portfolios despite the Sensex and Nifty not being too far from their lifetime highs. The big indices have retreated just 5-6 percent from their peaks, but the price damage in mid and small cap shares has been severe.

Here are some data points that describe the carnage in the market on Tuesday, June 6th. During the day, trading in 381 stocks on the BSE was frozen after there were only sellers in those stocks. Nearly 700 stocks, or one in every four stocks are trading within 5 percent of their 52-week lows. Sector indices that are close to their lows are power, telecom, infrastructure, utilities, healthcare and public sector undertaking.

There are various reasons why many these stocks are being hammered. In many cases, weak fundamentals are to blame. But market players say the recent policies and regulations by the government and market regulator SEBI are aggravating the situation.

The introduction of long-term capital gains tax from February 1 had many investors rushing to book profits mainly for tax considerations. Soon after, mutual funds began selling shares of smaller companies because the regulator introduced a new system of classifying stocks bought in the various schemes. Last week, SEBI tightened margin requirements to curb speculation and this has resulted in a new round of selling.

The retail investor is left wondering if the regulator is there to save them, who will save them from the regulator.

For someone who follows only the Nifty and Sensex as a gauge of market sentiment, the meltdown is not visible. A handful of stocks are giving the impression that all is well in the Indian markets.

The top five stocks in Nifty 50 account for a third of the market capitalization of the indices. Around 15 stocks have a weight of less than 1 percent of the index. In other words, the indices are like a Doberman, which will not be affected much even if the tail is chopped off. Nine of the top 10 stocks are trading close to their 52 week high levels. The only high market cap stock which is away from their highs is SBI.

An index is supposed to reflect the health of the market. Our indices are currently so skewed that they do not reflect the sickness that has spread to most of the market.

The purists might say that it is the nature of the beast where the top companies in terms of market capitalization will account for the bulk of the weight of the index. The index is expected to represent the health of a major portion of the market, but this is nowhere near the truth.

It is like taking a financial health of India by looking at the net-worth of top 10 richest Indians. For the common Indian, like a market investor, this is not even funny.

MORE WILL UPDATE SOON!!