The Average Nifty Stock Has Not Fared Well For Years
When talking about Indian stocks, we don't want to use the Large-Cap Nifty 50 as our proxy; instead, we want to look at the Nifty 500 as our broad measure of performance. Although it is still market-cap weighted, the fact that it includes Small, Mid, and Large-Cap stocks makes it a much more comprehensive measure of performance.
With that said, it remains an imperfect measure due to India's market being top-heavy. The ten largest stocks in the Nifty 500 comprise roughly 40% of the index's weighting, so it's difficult for Mid and Small-Cap stocks to have an impact on it.
Despite how the indexes are constructed, it's important to remember that this "stock market" is actually a "market of stocks," and participation in the trend matters...and weak participation has been a primary issue in preventing a sustainable long-term uptrend from forming and continuing.
In our chart of the Nifty 500, we've embedded some stats from August 30th, 2016, when the index made a new high, as well as January 20th, 2020, when it topped. While the performance of the average/median stock has mostly tracked the performance of the Nifty 500 since it topped two months ago (~33% vs. ~30%), there is a significant discrepancy in their performance since the index made a new high in 2016 following its cyclical bear market.
Click on chart to enlarge view.
The median stock in the Nifty 500 is down 18.37% since August 30th, 2016, while the index is only down 6.05%. That massive divergence shows us that there were plenty of stocks in the market left behind during the 2016-2018 rally in the Nifty 500 which have been preventing it from moving to new highs and are ultimately leading us lower as the selling picks up.
Until we start to see this downside participation from stocks slow down, there's little reason to be bottom fishing. Cash and patience remain our best bet, knowing full well that there will be violent countertrend rallies in the near-term as stocks carve out a tradeable low.
Even when that does occur, we'll also approach the market from the perspective that there is a ton of overhead supply above current levels that will take a long time to work through. The current environment is not one in which stocks turn on a dime and rally to new highs in a straight line. History suggests that we should strap ourselves in and be prepared for continued volatility and a long period of consolidation to repair the technical damage done to a lot of stocks and indexes in India and around the globe.
The first step, however, remains for prices to stop falling!
If you enjoyed this post and want access to all of our premium research, start a 30-day risk-free trial. Or sign up for our "Free Chart of the Week" to receive more free research like this.
Thanks for reading and let us know if you have any questions!
Allstarcharts Team