Stock Market Faces Steep Sell-Off: Nifty 50 Falls 16% from Peak – Is It Time for Value Buying?

Five Triggers to Watch Before Making Investment Decisions

The Indian stock market has been in a freefall for the past few months, with Nifty 50 tumbling 16% from its record high of 26,277.35, set on September 26, 2024. The BSE Sensex also plunged by 15%, while the Bank Nifty index witnessed an 11.20% dip from its all-time high of 54,467. The correction has been more severe in the broader market, with the BSE Midcap Index falling over 22% and the BSE Smallcap Index sinking by 25.50% from their respective peaks.

Amid the ongoing market turmoil, investors are grappling with the dilemma of whether to bottom fish or stay cautious. Market experts suggest that before making any significant investment decisions, traders should consider five crucial triggers that may indicate whether the correction has bottomed out or further downside is expected.

1. Promoters’ Activity: Are They Buying?

A key signal for a potential market bottom is insider buying by company promoters. According to Anshul Jain, Head of Research at Lakshmishree Investment and Securities, promoter activity plays a crucial role in market trend reversals.

“In every major market correction, Foreign Institutional Investors (FIIs) are typically the first to sell, followed by company promoters—especially in small-cap and mid-cap stocks. However, a true trend reversal often begins when promoters start increasing their stakes, signaling confidence in their companies’ long-term potential,” Jain explained.

At present, FIIs remain net sellers, and there are no strong signs of promoters significantly raising their stakes. This suggests that further downside is possible before the market stabilizes.

What Investors Should Watch:

• Monitor insider trading reports to see if promoters are buying stocks of their own companies.
• Look at bulk deal data for evidence of large insider acquisitions.
• If promoters increase their stakes, it could indicate that valuations are attractive.

2. Trade Volume Trends: Is Liquidity Returning?

In any bull market, trade volumes rise consistently, reflecting strong investor participation. However, during corrections, volumes typically decline as selling pressure intensifies.

According to Mahesh M Ojha, AVP – Research at Hensex Securities, a spike in trade volumes at lower levels often suggests that institutional investors and smart money are accumulating stocks.

“At the moment, there is no significant rise in trading volumes, meaning that market participants are still cautious. A genuine recovery will be indicated by increased volumes in large-cap stocks, followed by mid-caps and small-caps,” Ojha noted.

Key Indicators for Investors:

• Watch for higher-than-average trade volumes on green days, signaling accumulation.
• Monitor delivery-based buying in fundamentally strong stocks.
• Liquidity should improve before committing significant capital to value buying.

3. Upcoming Corporate Earnings: Will Q4 Results Offer Respite?

One of the biggest concerns in the market correction is lackluster corporate earnings. In Q3 FY25, the Nifty 500 companies saw mid-single-digit growth, leading to earnings downgrades for the upcoming quarters.

“The recent sell-off has been partly driven by poor earnings. Q4FY25 results and management commentary will be crucial in determining market sentiment,” said Mohit Khanna, CFP – Fund Manager at Purnartha Investment Advisors.

One major area of concern is the banking sector, where credit growth has slowed by nearly 11%. If banking stocks report weaker earnings, it could impact the overall index, despite the Reserve Bank of India (RBI) considering rate cuts to boost liquidity.

What Investors Should Track:

• Q4 earnings results for Nifty 50 companies and whether they beat or miss expectations.
• Sector-specific growth trends, particularly in banks, IT, and auto.
• Management guidance on future earnings and macroeconomic trends.

4. Market Valuations: Are Stocks Still Expensive?

One of the simplest ways to determine whether the market has reached fair value is by examining the Nifty 50’s price-to-earnings (PE) ratio.

Historically, when the Nifty 50 PE ratio significantly exceeds its average, corrections tend to follow. Conversely, when PE ratios drop to historical lows, it often signals a buying opportunity.

“In 2008, after the financial crisis, the Nifty 50 traded at a PE ratio of 12.29, marking an attractive valuation for long-term investors,” said Gaurav Goel, Founder & Director of Fynocrat Technologies.

Currently, while valuations have corrected, investors must analyze whether individual stocks are still overpriced relative to earnings. Stocks with PE ratios between 10 and 15 often provide good long-term value, but thorough research is essential before making investment decisions.

What Investors Should Do:

• Compare current Nifty 50 PE ratios with historical levels.
• Look for individual stocks trading at reasonable valuations relative to their peers.
• Avoid chasing falling stocks without fundamental support.

5. Retail Participation: Is FOMO Driving Markets?

Another crucial trigger to monitor is retail investor sentiment. When FOMO (Fear of Missing Out) kicks in, retail investors tend to rush into the market at high valuations, often leading to more pain in the long run.

According to Gaurav Goel, “The rise in active Demat accounts and SIP contributions can indicate whether retail investors are still participating aggressively. If retail sentiment remains high despite falling stock prices, the market may not have bottomed out yet.”

Key Metrics to Watch:

• Mutual Fund SIP inflows – If they remain high, retail investors are still optimistic.
• Demat account openings – A surge in new accounts suggests FOMO-driven participation.
• Trading activity in penny stocks – Increased activity in low-quality stocks may signal speculative excesses.

How to Find a Value Pick Amid Market Turmoil

Amid the sharp correction, value investors must focus on fundamentally strong companies with solid earnings growth, low debt, and competitive advantages.

Akriti Mehrotra, Research Analyst at StoxBox, advised that investors should prioritize companies with stable cash flows and strong balance sheets.

“Rather than blindly buying into the market correction, look for businesses that can withstand economic downturns and emerge stronger. Focus on sectors that have long-term growth potential, such as infrastructure, IT, and financials,” Mehrotra suggested.

Final Thoughts: Is It Time to Buy or Wait?

While Nifty 50 and Sensex have undergone a significant correction, the market has yet to show strong signs of bottoming out.

• Investors should wait for FIIs to resume buying before making large commitments.
• A rise in trade volumes and insider buying by promoters would indicate a potential trend reversal.
• Earnings growth in Q4FY25 and valuation metrics should guide investment decisions.

By following a staggered investment approach and focusing on quality stocks, investors can navigate the current market volatility wisely while avoiding common pitfalls.