Where is the market headed?

The market saw a small bounce as Nifty approached the 25,000 level yesterday, attracting some fresh buyers and leading to today’s recovery. However, the broader market is continuing to perform well, moving up steadily.

Market Overview

The market found strong support near the 25,000 mark and built on that bounce today, closing around 25,195, up almost 0.5%.

Nifty Next 50

Nifty Junior also made a comeback, recovering losses from the past two to three sessions, closing up 0.65%.

Nifty Mid and Small Cap

Mid caps performed strongly, rising 0.92% and closing very close to their recent all-time highs.

Small caps also followed, up 0.81%, closing near multi-month highs—around six or seven months and not too far from an all-time high.

Bank Nifty

Nifty Bank closed up 0.43%—not a major move, but a decent one, especially as it has once again conquered the 57,000 mark.

GOLD

Gold is up around 0.4%, currently priced at ₹9832 per gram.

Advance Decline Ratio

The advance-decline ratio was very flat but slightly in favour of advances. While advances were well ahead of declines in the morning, the gap narrowed but remained steady through the day, ending at 361 advances to 139 declines.

Heat Maps

HCL Tech reported very poor numbers, while TCS and Infosys recovered slightly. Bajaj Auto performed well, along with Hero Motors, Eicher Motors, and Tata Motors—all autos were up. Sun Pharma, Dr. Reddy’s, and Bharti Airtel also closed higher.

There were some losers among banks, but other Banks and NBFCs showed strength, so not all were down.

In the Nifty Next 50 space, stocks like TVS Motors, LTIM, BPCL, IOC, VBL, Motherson, Chola, and DLF posted small gains. There were no major losers in the Nifty Next 50 today.

Sectoral Overview

In the sectoral trend, Capital Markets made a strong comeback, with Nifty Capital Markets up 2.1%. Auto gained 1.5%, Pharma rose 1.14%, Manufacturing was up 1%, and Tourism gained 0.9%. PSU banks also rallied, rising 0.87%, while Real Estate was up 0.8%, and Consumption and FMCG added about 0.7% each.

There was no sector that lost ground today. Metals and Private Banks were flat, but none of the sectors closed negative. In the capital market space, after seven to eight sessions of decline, today marked the first significant up move.

Sector of the Day

Nifty Capital Mkt

In the Capital Market space, there had been seven to eight sessions of decline, and today marked the first significant up move. Leading the gains were Nippon Life up 4.5%, HDFC Asset Management Company also up 4.5%, BSE rising 4%, along with CAMS up 3.3% and UTI Asset Management moving higher as well.

Story of the Day: Are Markets Overheated?

Whenever markets approach new highs, discussions often surface around whether markets are overheated. Investors tend to question whether to withdraw funds, add more capital, or simply ignore such narratives.

Over the past two decades, the Indian market has demonstrated significant growth. A 30-year chart shows only six down years in the last 26, out of which two are relatively insignificant, leaving just four meaningful down years.

A common point of debate is how large the Indian stock market is in relation to its economy. The stock market does not always reflect the exact state of the economy. At times, it moves in sync, while at other times it may expand faster or lag behind. To assess whether this expansion is proportionate, the CNX 500-to-GDP ratio is an important metric to consider.

The CNX 500-to-GDP ratio helps identify major market cycle turning points. It shows periods when market momentum either accelerates or stalls and highlights how external events impact the market relative to the economy. This ratio also assists in detecting structural shifts that may influence long-term market trends. Over the past 25 years, this ratio has moved within a defined range. (see the image below)

When the ratio reaches the upper band, it signals potential overheating. When it touches the lower band, it indicates a safer investment zone. At present, the ratio is positioned closer to the upper band, though not at an extreme.

Looking at historical phases, three notable downward cycles stand out. From February 2000 to September 2001, there was an 18-month drawdown of 67%.

The Global Financial Crisis saw a 14-month decline of 60%.

Between September 2010 and August 2013, a 35-month phase resulted in a 15% drop.

On the upside, between 2001 and 2007, markets delivered 822% returns over six years.

From November 2008 to October 2010, markets gained 184% over two years.

Post-COVID, a one-and-a-half-year phase brought 155% returns.

These upward phases usually begin when the ratio is near its lower band.

Currently, the CNX 500-to-GDP ratio faces three possible outcomes: moving higher, staying flat, or declining. If the ratio breaks out higher, potential drivers could include a global risk-on sentiment, major interest rate cuts, India decoupling from global trends, increased domestic real estate activity, stronger foreign inflows, and slower INR depreciation relative to market growth.

The second scenario involves the ratio consolidating. In this case, the CNX 500 would move broadly in line with GDP growth. No major valuation changes would occur, with balanced capital flows and a steady INR without sharp surges or exits. The third scenario would be a sharp drop in the ratio, possibly triggered by broad market sell-offs while the economy remains stable. Factors such as interest rate hikes, domestic policy disruptions, valuation corrections, corporate earnings disappointments, INR depreciation, or global financial or geopolitical shocks could contribute to such a decline.

However, exiting the market purely because the ratio is near its upper band is not advisable. Historical charts provide useful context, but investment decisions should be based on actual price action. Markets can behave irrationally, and relying solely on historical patterns may not be effective. Managing FOMO during unexpected rallies is part of handling such situations.

While studying macroeconomic indicators and global trends offers valuable insights, focusing on price action proves more effective for decision-making. Awareness of broader conditions helps avoid surprises but should not dictate every move. Conditioning the mind with this understanding ensures disciplined investing.

The CNX 500-to-GDP ratio offers a meaningful lens to evaluate market cycles, yet it should be viewed as just one tool among many. Balancing macro insights with real-time market behaviour is essential for navigating unpredictable market environments.