Markets not yet at worrying levels

Indian equity markets seem to have broken a key resistance level and are at a 32-month high. The key debate is whether it is becoming exuberant and is technically vulnerable.

- The trading activity in the market appears quite encouraging. For one, investors appear to be buying shares for cash rather than just trading them. The overall trading activity in the market is strong and that augurs well for an uptrending market.

- Market breadth is neutral. Advance-decline has been weak even as the mid and small-cap indices have continued to do well.

Breadth indicators such as price performance gap between the best and worst performing stocks, percentage number of stocks declining, percentage number of underperforming stocks and average loss of the worst quintile of stocks are in neutral zone and suggest that the market is far from overheated.

- There are other breadth indicators which compare stocks to their all-time highs. These have been reliable timing indicators in the past. The number of stocks which are within 5 percent of their all-time peaks is still well below the "sell" threshold and, hence, the conclusion is consistent with the other breadth indicators.

- The near-term momentum indicators have a more interesting story to tell. The percentage number of stocks that are either 20 percent or more off their 52-week high or within 5 percent of their 52-week high.

While the former is falling, the latter is rising and suggests that price momentum is building up in the market. They also indicate that more momentum is likely in the coming weeks after which market may appear over bought and get ready for a correction.

The market's breadth and depth suggests that the market needs more participation and may bear more upside before a correction sets in.

Image: An investor reacts while watching the display screen on the facade of the Bombay Stock Exchange (BSE) in this May 2010 file photo.

Text: Amitava Neogi, Reuters

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