19 Nifty500 Stocks Holding Strong Above 200-DMA Amid Broader Market Decline

The Indian stock market is showing a puzzling picture. While the Nifty index remains relatively stable, the internal market dynamics tell a different story. As of early February, only 19 Nifty500 stocks are above their 200-day moving average (200-DMA). This number is strikingly low and signals underlying technical weakness that many investors and analysts might be overlooking. This post explores what this means for the broader market, the divergence between the index and market breadth, and the implications for investors, especially those focused on midcap and smallcap stocks.

Understanding the Technical Weakness Hidden Under the Index

The 200-DMA is a widely used long-term trend indicator. Stocks trading above this level are generally considered to be in a healthy uptrend. When only 19 Nifty500 stocks are above 200-DMA, it means that 96.2% of the stocks are below their long-term average. This is a clear sign of technical weakness in the broader market.

Despite this, the Nifty index itself has not fallen sharply. This divergence between the index and the breadth of stocks is a warning sign. The index is being supported by a handful of large-cap stocks, masking the weakness in the broader market.

Index vs Breadth Divergence: What It Means

The Nifty index is a market-cap weighted index, meaning that a few large companies can heavily influence its movement. Currently, large caps like Reliance Industries, HDFC Bank, and TCS are holding up the index. These stocks have managed to stay above their 200-DMA and provide support to the overall index level.

Meanwhile, the majority of midcap and smallcap stocks are in a downtrend. This creates a divergence where the index appears stable, but the internal market breadth is weak. This divergence often precedes a broader market correction because the strength is concentrated in too few stocks.

Large Caps Holding Up the Index

The resilience of large caps is a key factor in the current market scenario. Reliance Industries, HDFC Bank, and TCS have shown relative strength by maintaining their positions above the 200-DMA. Their strong fundamentals, steady earnings, and investor confidence have helped them resist the broader market weakness.

This concentration of strength in a few stocks means that portfolio managers and investors need to be cautious. Relying solely on the index level can be misleading when the majority of stocks are underperforming.

Midcap and Smallcap Carnage

The situation is much worse for midcap and smallcap stocks. About 96% of these stocks are in a downtrend, trading below their 200-DMA. This widespread weakness is a red flag for investors who have exposure to these segments.

The carnage in midcaps and smallcaps reflects broader economic concerns, liquidity issues, and profit-taking. It also highlights the risk of chasing returns in smaller stocks without considering technical health.

Warning Signal from Breadth Weakness

Market breadth measures the number of advancing stocks versus declining stocks. When breadth weakens significantly, it often signals that the market is losing internal strength. The current scenario, where only 19 Nifty500 stocks are above 200-DMA, is a classic example of breadth weakness.

Historically, such breadth weakness has preceded index falls. Investors and technical analysts should view this as a warning signal. The stability of the Nifty index may not last if the underlying weakness in the majority of stocks continues.

What Investors and Analysts Should Watch

• Monitor the number of stocks above 200-DMA regularly. A rising number indicates improving breadth, while a falling number signals worsening market health.

• Watch the performance of large caps like Reliance, HDFC, and TCS. If these stocks start to falter, the index could face sharper declines.

• Be cautious with midcap and smallcap investments. With 96% of these stocks below their 200-DMA, risk is elevated.

• Look for confirmation from other technical indicators such as volume, relative strength index (RSI), and moving averages to gauge market direction.

• Consider portfolio diversification to reduce exposure to weak segments and focus on stocks with strong technical setups.

  
  

Summary

The Indian market is currently showing a hidden technical weakness beneath a stable Nifty index. With only 19 Nifty500 stocks above 200-DMA as of early February, and 96.2% of stocks below their long-term average, the broader market is under pressure. Large caps like Reliance, HDFC, and TCS are supporting the index, but the carnage in midcap and smallcap stocks is a serious concern.

This divergence between index and breadth is a warning sign that should not be ignored. Breadth weakness often precedes index falls, and investors need to be vigilant. Understanding these technical signals can help portfolio managers, technical analysts, and investors make better decisions in a challenging market environment.