BSE Sensex falls below 200-day moving average for first time since Nov 2016

The Sensex on Monday dropped below the 200-day moving average (DMA) — a key technical support level — for the first time since November 2016. Further, 18 of the 30 scrips of the Sensex are currently trading below their 200-DMA, indicating a broad-based weakness. Volatility could also be on the rise as the VIX index has surged 25 per cent this year.

The current bout of selling in the market was started in early February. It was triggered by a global sell-off due to hardening of US bond yields. The Rs 129-billion fraud at the Punjab National Bank (PNB) further intensified the selling sentiment on the Street.

“In the ongoing correction, the Nifty has fallen more than 1,000 points from its peak in January. The sell-off could intensify if the index falls below the 10,000-mark. Technical indicators currently suggest the pain will continue in the near-term. However, the correction has come after a 28 per cent rally in 2017. Hence, any further dips in the index should be used as a buying opportunity by investors who want to build a long-term portfolio,” said Chandan Taparia, derivatives and technical analyst at Motilal Oswal Securities.

The performance of broader markets is another cause of concern, as close to 300 stocks in the BSE 500 index are currently below their 200-DMA. Nearly half of these stocks are trading at more than 15 per cent below their 200-DMA.

“We are still in the early phase of market correction.

The sell-off could intensify if there are any unexpected outcomes from state elections. The problem with mid-cap stocks has been expensive valuations without any meaningful recovery in earnings. Investors should prefer blue-chips over mid-cap and small-cap stocks as they offer stable earnings and are currently available at attractive valuations,” said G Chokkalingam, founder, Equinomics Research.

Half of the BSE 500 companies have fallen more than 25 per cent from their peaks, underscoring the pain in the market after the recent sell-off. The BSE Midcap and Smallcap indices have declined 14 per cent from their January peaks, underperforming the benchmark Sensex, which has declined 9.3 per cent. The fall, however, comes after four years of sharp outperformance.

Indian stocks could see price downgrades if the correction prolongs, analysts said. Brokerages have revised the price targets of 400 BSE-500 companies. Even 28 companies from the benchmark Sensex have seen downward price revision in the last one month, data showed.

The markets have witnessed severe downward bias during March. Analysts said the government's decision to reintroduce long-term capital gains (LTCG) tax has also prompted some of the selling from the investors.

“The current period has been a difficult phase for Indian markets. There has been selling due to the reintroduction of LTCG tax. There is also some redemption pressure on the domestic mutual funds. However, the long-term play looks positive,” said Gaurang Shah, head investment strategist, Geojit Financial Services.