Market Bottom or Mirage? Assessing the Strength of the Recent Rally

The recent upswing in the markets has left investors wondering: Is this the beginning of a sustainable recovery or just another dead cat bounce? While the rebound from the lows of the first week of March has been encouraging, the broader market health remains questionable. The key question is whether this rally has the legs to sustain or if it’s merely a temporary reprieve before another leg down.

According to the well-established follow-through day concept, as outlined by William O’Neil, an American businessman and stockbroker, these are indeed markers that can signal a potential bottom. But while parts of the market are showing signs of life, it would be premature to declare a broad-based revival.

The first step in assessing a market bottom is identifying a level from which a broad-based recovery emerges. The March 3-4 lows in the Nifty 500 showed initial signs of a potential bottom, with sectors like banks, metals, and finance leading the rebound. These pockets demonstrated relative strength even during the downturn, suggesting institutional interest. However, a true market bottom requires more than just a few strong sectors—it needs broad participation.

Historically, we have seen that a sustainable rally is confirmed only if the market exhibits strong volume-backed advances between the 4th and 15th day after a probable bottom. The recent rally has shown some promising signs—strong moves in leading sectors, backed by volume expansion. However, the broader market (Small-Caps and Mid-Caps) remains weak, with only about 30 per cent of the stocks above their 50-day moving average (DMA), although this has improved substantially from the sub 20 per cent a couple of weeks ago.

A study of market movements in the past shows that healthy bull markets require at least 50-60 per cent of the stocks trading above the key moving averages. The current recovery is led by banks, metals, and financial services—sectors that held up relatively well during the correction. Yet, the broader market, excluding these leaders, continues to struggle. This divergence suggests that while a bottom may be forming in the strong sectors, the overall market is not yet out of the woods.

The looming uncertainty around the U.S. trade policies and global economic retaliation remains a critical risk. In the past, trade wars have led to prolonged market volatility, and if tensions escalate, the weaker sectors could face further pressure. The market’s reluctance to fully recover indicates that investors are still cautious.

Domestically, the upcoming Reserve Bank of India’s monetary policy meeting (April 7-9) will be watched with bated breath. The recent rate cut to 6.25 per cent has raised expectations of a supportive monetary environment, but the central bank’s commentary on inflation and future rate trajectories will be critical in shaping the market sentiment. Additionally, the onset of the Q4 earnings season presents another layer of uncertainty. The FY25 earnings were marked by weakness due to a tight monetary policy, limited fiscal support during the election cycles, and geopolitical headwinds.

While expectations are building up for a revival in earnings from Q1FY26, the Q4 results will provide crucial insights into corporate health and forward guidance. No doubt the recent rally is encouraging, but it remains selective. Strong sectors like banks and metals may have bottomed, but the broader market needs more confirmation—participation from small-caps and mid-caps, improving breadth, and stability in the global macro conditions.

For now, investors should focus on sectors showing relative strength while remaining cautious about the weaker pockets. The market may not have fully bottomed yet, but the worst could be over for the leading sectors. Until broader participation improves, treat this rally with cautious optimism rather than unbridled confidence. Stay tuned to keep yourself updated and make the most of market opportunities.

RAJESH V PADODE
Managing Director & Editor