market risk: Risk indicators now scarier than 2008, more pain could follow

ET Intelligence Group: A week, the late British premier Harold Wilson had famously said, is a long time in politics. It isn’t markedly different in the investing world either.

India, the relative outlier in global growth assets, has fallen from grace in a very short period of time, with overseas funds flying to safety. Foreign portfolio investors (FPI) have sold Indian equities worth $4.9 billion lately — the biggest such selling ever recorded in less than two work weeks.

The risk indicators seem rather stark, making the reference to the 2008 subprime sinkhole more relevant by the minute. Hence, Indian equities have lost $272 billion in market value in just 10 trading sessions, with the selling getting brutal each passing day.

The Bloomberg’s propriety Fear and Greed indicator — a gauge of buying strength to the selling strength — of the Nifty 50 index shows a negative reading of 1,813 after the record 8.2% decline in a single day on Thursday. The current reading of the Bloomberg Fear and Greed index is worse than negative 1,445 during the global financial crisis in January 2008.

Similarly, the Nifty’s 14-day Relative Strength Indicator (RSI) — a gauge to measure the magnitude of price change — that evaluates the overbought or oversold condition of securities dropped to 13.04, the lowest level since 2003. The reading of RSI below 30 points to ‘oversold territory’, while a value above 70 is considered ‘overbought’. In the past, there are two instances of the Nifty’s RSI dropping below 20 — May 2004 and January 2008.

Extreme pessimism has enhanced volatility to a record. In the Nifty 50, just 16% of its constituents are trading above the 200-day moving average —perceived as a critical support for the medium term. That’s the lowest reading in the Asia Pacific region, barring Australia.