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Market bottom? Easing VIX, multi-year-low advance-decline ratio show we may have found one

Nifty50 has had its second-worst quarter ever during the January-March period.

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Last Updated: Apr 10, 2020, 02.12 PM IST
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The sharp drop in VIX -- which signals possible market volatility for the next 30 days – has come as a shot in the arm for the bulls and it hinting at market stability in the coming weeks.
NEW DELHI: An advance-decline which has largely been skewed towards the latter over the past few days and an easing of India VIX from recent highs suggest the market has become oversold position and that it may have found a bottom.

NSE benchmark Nifty50 has had its second-worst quarter ever during the January-March period, recording a 23 per cent fall.

India VIX, the fear gauge, hit a multi-year high of 86 level during this period. But it has since started falling and moved to 49.74 level by the end of Thursday’s trade.

Nifty ended the truncated week a tad above the 9,100 mark, after having rallied 12.72 per cent to post its biggest weekly gain since May 2009. The 30-share Sensex ended a seven-week losing streak and closed 4.23 per cent, or 1,265 points, higher at 31,159.

The sharp drop in VIX -- which signals possible market volatility for the next 30 days – has come as a shot in the arm for the bulls and it hinting at market stability in the coming weeks.

“VIX has cooled off after testing the highs of 86-87 levels, which we had last witnessed during the 2008-09 market crash. This suggests wild swings could possibly subside going ahead, even though bouts of corrections cannot be ruled out,” said Aditya Agarwala, Senior Technical Analyst at YES Securities.

Sameet Chavan of Angel Broking said higher volatility in the recent past kept market participants on their toes. “With the fall in VIX, we hope the worst is behind us and the coming month will bring back smiles on investor faces,” he said.

VIX hit a record high level of 92 in 2008.

Meanwhile, the net of Nifty500 advance-decline ratio has hit a multi-year low of -497 level, something that has been seen only thrice in last two decades.

The advance-decline ratio is an indicator that shows market breadth. It is based on net advances, where the number of declining stocks is subtracted from the number of advancing stocks to reflect the health of the broader market.

In the last four major corrections in 2015, 2010, 2008 and 2006 -- each measuring at least 30 per cent fall from respective lifetime highs amid global selloff – the net advance-decline ratio had approached oversold condition of -496, -466, -494, -487, respectively.

“These extremes typically have coincided with significant market bottoms,” says ICICI Securities, which recommends investors to utilise the ongoing selloff to construct long-term portfolio of quality stocks in a staggered manner with at least one-year time horizon.

The Nifty500 universe covers 90 per cent of the free float market capitalisation on NSE and this is used to measure the extent of panic in the market.

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