Note: «NYSE Arca» here denotes «Tape C» or regional exchange volumes, most of which is represented now via NYSE Arca.

All exchange volumes tended to be pretty flat right until 2020 when Nasdaq-listed stocks’ traded volumes uptrended and stayed elevated over the other two exchange groupings. The large spikes largely coincide with actions around options rollover and index rebalance dates which, since 2020, are dominated by actions involving Nasdaq-listed stocks.

Juxtaposing the exchange volumes over PE Ratio trends and index levels lead to the following conclusion: while American and British valuations tended to be aligned in valuation trends, the effect of «special events» (such as rollovers and rebalances) on valuations have become more sticky in America (particularly in Nasdaq-listed stocks), thus laying bare a change in market player behaviour, with the British and Indian bourses’ players exhibiting greater «rationalized» behaviour, i.e. a muted reaction to hyped narratives driven by incomplete consideration of data.

Juxtaposing the exchange volumes over PE Ratio trends and index levels lead to the following conclusion: while American and British valuations tended to be aligned in valuation trends, the effect of «special events» (such as rollovers and rebalances) on valuations have become more sticky in America (particularly in Nasdaq-listed stocks), thus laying bare a change in market player behaviour, with the British and Indian bourses’ players exhibiting greater rationalized behaviour.

It bears noting, however, that the bulk of this non-rationalized behaviour is centered around Nasdaq-listed stocks, which tend to be tech stocks. «Tech» dominates market attention quite heavily, with a select few among them attracting attention to the cost of all other companies’ stocks.

Key Takeaways

So trenchant is the Indian market players’ preference for ratio discipline that on Wednesday, i.e. the 17th of January, a missive by the Reserve Bank of India (the country’s central bank) directing banks to increase risk weights on consumer loans led to a rapid correction⁴ on bank stocks, followed by a downward adjustment on virtually every other sector barring IT. This correction took place despite every bank posting gains in their most recent quarter and an overall net positive forward outlook. This net positive outlook is a common theme in all other sectors. While a number of other global events have been attributed to this, said events are of little impact to a universe that is increasingly self-contained. Such a scenario is vanishingly rare in today’s equity universe in the universe.

Ironically (or perhaps quixotically), this ratio discipline is largely why a large-scale flight of capital from U.S. markets to India isn’t likely. While hype may or may not be the leading factor behind compelling overvaluation which leads to volatility, volatility presents tactical opportunities. India’s FPI universe is predominantly comprised of institutional long-term growth players seeking a «rationalized» asset mix and not, say, profit-seeking hedge fund from all over the world especially when the country’s financial regulators are prone to lay a heavy hand across an errant player’s back. While lowering «rationalization» in the U.S. bourses might have compelled some flight, it’s all within the rubric of adjusting risk.

As the examination of volumes vs ratios and index levels indicate, the market players’ playbook is steadily disaggregating across the world. For a player in the American market, the pent-up lack of market breadth is a sign that sector rotation evident in the past week is likely to continue to pick up steam over the next couple of weeks. However, whether this will lead to a period of sustained and more «rational» behaviour isn’t necessarily a given.

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1. “Over 50 smallcap stocks rise 10-40% as Sensex hits lifetime high driven by IT shares; do you own?”, Mint, 13 January 2024
2. “India ETF flows hit record in 2023, analysts see momentum persisting in election year”, Reuters, 15 January 2024
3. “Market Views: Will India overtake China in investment opportunities?”, AsianInvestor, 11 May 2023
4. “After HDFC Bank results, US Fed signals, markets fall sharpest in 19 months”, New Indian Express, 18 January 2024