Market breadth cracks deepen as ADR sinks to 10-month low

The Advance-Decline Ratio (ADR), a widely watched indicator of overall market health, was at a 10-month low in November, pointing to growing weakness in mid- and small-cap stocks.

The monthly average ADR reading of all BSE stocks in November was at 0.89, the lowest since February, when it stood at 0.72, the lowest since March 2020, when the market crashed at the onset of Covid. In December so far, the ratio has declined further to 0.68 as of Monday in the wake of the sell-off in mid-cap and small-cap stocks.

A declining ADR means more stocks are falling than gaining and points to a weakening market. The market breadth weakened even as the Sensex and Nifty hit an all-time high on November 27.

“The divergence in market breadth indicators like advance decline ratio indicates that investors are turning cautious on mid and small-cap stocks and seeking refuge in large-cap stocks,” said Sriram Velayudhan, senior vice-president, IIFL Capital Services.

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November Advance-Decline Ratio at 0.89 was lowest since Feb

The Sensex and Nifty were close to 6% in February when the ADR was at a five-year low.

In the last three months, the Sensex and Nifty gained roughly 5%. The Nifty Midcap 150 gained 1.2%, while the Smallcap 250 index fell 4.2% in the same period. “The small-cap stocks continued to remain laggards, while midcap stocks have failed to sustain any momentum in December,” said Nilesh Jain, head of Derivatives and Technical Research, Centrum Broking. Jain said the divergence in ADR and Nifty performance is also primarily due to strength in banking stocks. Analysts said the relative strength indicator (RSI) — a key momentum indicator — for the Nifty is pointing to caution.

“The bearish divergence in RSI indicates the lack of investor confidence,” said Jain. “Nifty has broken its 21 DMA (Day Moving Average) of 26,000 on Monday, and further declines of 300-500 points are likely.”

Jain said despite the corrections, large caps remain better placed, and investors are advised to stay cautious unless Nifty reclaims 26,000. Velayudhan said this underperformance is expected to continue till the broader selling abates.