Mumbai, April 11: Market breadth indicates that domestic stock indices have crossed an "Extreme Stress Zone" and present a rewarding entry point for investors, with a historical median one-year forward return of over 17.5 per cent, according to a report released on Saturday.
The "Extreme Stress Zone" is reached when over 70 per cent of Nifty 500 stocks trade below their 200-day moving average, indicating that fear has overwhelmed fundamentals in the market, according to the Vallum Capital report.
The Indian markets are in the "Extreme Stress Zone" or "Capitulation Zone" because over 71.3 per cent of Nifty 500 stocks are trading at this level.
The report stated that the recent correction has seen a clear divergence in risk sentiment across market caps, with small-caps underperforming large-caps by more than 1,000 basis points. Approximately 61 per cent of these stocks have fallen by over 10 per cent, with a median return of -17 per cent.
The mid-cap segment saw approximately 51 per cent of the stocks falling by over 10 per cent, while large-caps remained the most resilient, with only about 32 per cent dipping by over 10 per cent.
"One of the most significant indicators of the current recovery is the unprecedented speed of normalization in energy prices. Historically, crude oil shocks have been prolonged affairs. Analysis of seven major shocks over the last 46 years reveals a median duration of 30 weeks for prices to stabilize," the report noted.
The global mechanism for absorbing geopolitical friction has shifted from months to weeks, as the supply shock during the US-Iran war lasted only nine weeks.
India's price-to-earnings (PE) premium over Emerging Markets (EM) has undergone a significant compression, moving from a 2022 peak of 1.57x to a current level of 0.38x, the report said.
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