Nifty500 recently crossed the landmark 23,000 level, as it witnessed a swift rally rising 13.5% post-elections. 

How broad-based is the momentum right now?  In the June quarter, 234 of the 500 stocks in the index were trading at a discount of more than 10% from their 52-week highs, which means that more than 50% of Nifty500 stocks were hovering near year highs, a bullish signal. 

Analysing data from the past five years, we see that the Nifty500 is more likely to hit new highs when more than 50% of its stocks are trading near their year highs.

In this week’s Chart of the Week, we take a look at the number of Nifty500 stocks trading at a discount of over 10% from their 52-week highs, for every quarter over the past five years. We try to identify the correlation between overall market sentiment and the performance of Nifty500.

This screener tracks all Nifty500 stocks trading at a discount of more than 10% from their 52-week highs. Here, the screener rewind feature came in handy as it helped us to go back in time and see the number of stocks that were trading at a discount in previous quarters. 

Markets witness a roller coaster ride during the pandemic

On March 12, 2020, Nifty500 saw a decline of over 8% as Karnataka confirmed its first death from the Covid pandemic. The market also took a hit as the World Health Organization (WHO) declared the COVID-19 outbreak a global pandemic. In the weeks following up to March 12, the index had already set foot on a steady descent, declining more than 20% as Covid cases rose across the country.

Two weeks later, on March 23, Nifty500 crashed by another 917 points after falling 12.8% in a single day. The next day, PM Modi called for a complete lockdown as the death toll in India reached 10 and over 14,000 globally. Looking back in time, we can see that the lockdown imposed from March 24 eventually turned out to be a positive one for the stock market. Nifty500 also found the floor of what seemed like a bottomless pit at 6,151.6. 

Low interest rate period post-pandemic boost market to new highs 

Even though the lockdown seemed like a necessary caution to contain the spread of the deadly virus, it led to another set of tensions—an economic slowdown globally which led to many people losing their jobs. With everything at a standstill, consumption plummeted, and businesses began to fail. By the end of Q4FY20, the number of Nifty500 stocks trading at a discount of more than 10% jumped to 400, up from 281 stocks a quarter earlier.

To counter this, central banks worldwide slashed interest rates to negligible levels, injecting money into the economy to spur growth. The Reserve Bank of India (RBI) reduced its repo rate to 4% in May ‘22, and the US Fed slashed interest rates to 0.25% in March ‘22. This led to rampant borrowing and growth among major economies, causing most stocks to rally to all-time highs. Nifty500 rallied from a pandemic low of 6,151.6 to a high of 16,004.5 in just over a year and a half.

Low borrowing costs worldwide boost the economy, but send inflation sky-high

But, just as the world came out of the pandemic, another problem arose. Rising inflation started hitting both consumers and businesses. In Q3FY22, 364 Nifty500 stocks traded at a discount of more than 10%, which is a significant jump compared to 247 stocks a quarter ago.

In a bid to control inflation, central banks started raising interest rates. As a result, most of the companies, now used to low pandemic-era rates, were hit by rising financial costs on their bottom line. In the chart above, it is clear that the market sentiment remained bearish for six consecutive quarters starting from Q3FY22 to Q4FY23. During this period, more than 70% of the stocks belonging to the Nifty500 index traded at a discount of more than 10% from their annual highs.

The bearish trend came to a halt as RBI surprised markets by holding interest rates steady at 6.5% on April 6 following six consecutive hikes. Most analysts had expected one final 25 basis point (bps) hike in the RBI's current tightening cycle, which has seen it raise the repo rate by a total of 250 bps since May last year. 

As soon as rate hikes stopped, and speculations surrounding rate cuts started to emerge, Nifty500 witnessed a swift rally to break the 16,000 mark on June 7 last year. In Q1FY24, there is a significant decline in the number of stocks that are trading at a discount of more than 10% from their one-year high, halving from 403 in Q4FY23 to 206 in Q1FY24, suggesting a bullish stance. 

Nifty500 rises to new all-time highs as PM Modi wins historic third term

The number of stocks trading at sharp discounts fell further to 157 indicating strong bullish momentum in Q3FY24, with Nifty500 rallying by around 12% during the same quarter. This rise came after the Modi-led Bharatiya Janata Party was able to score victory in three of the four state elections in December 2023, leading to speculations of Modi easily winning a third term as Prime Minister in the upcoming Lok Sabha elections. 

However, this bullish momentum faded in the months leading up to the election. In the chart above, we can see a bearish blip in Q4FY24 as 341 Nifty500 stocks were trading at a discount of more than 10% from their one-year highs. But, as Narendra Modi was eventually reelected as PM for his third term with the help of a coalition government, volatility returned to normal levels. More than 50% of stocks were trading near their 52-week high at the end of Q1FY25 as Nifty500 crossed the 22,500 mark.

Currently, markets are looking bullish as only 207 of the total Nifty500 stocks are trading at a discount of more than 10% from their annual highs. The Nifty500 is poised to trade above the 23,000 level, with around 60% of its constituents trading near their one-year highs. With inflation under control, analysts expect the RBI to start the rate-cutting cycle in Q3FY25. 

Meanwhile, keep an eye on the Q1 results coming this month, coupled with the Budget announcement due on July 23, which could determine the course of the markets going forward.