A key observation is that whenever more than 75 per cent of stocks trade below a P/B multiple of 6, the index tends to be near a cyclical bottom. While this signal does not indicate an immediate reversal, it has historically acted as a high-probability zone for accumulation, where downside risk begins to be limited and smart money gradually builds positions.
In addition, a sharper near-term trigger emerges when over 30 per cent of stocks fall below a P/B of 2. This reflects deep value conditions across the broader market and has often been followed by short-term upside momentum. Notably, a similar setup was seen in the period before June 2023, when the index went through a consolidation phase with such percentage of stocks with PBV below 2 were above 30 per cent before delivering a strong rally.
At present, this metric stands at 31 per cent, placing the market in a zone where the probability of a tactical bounce is rising. However, external variables remain critical. Ongoing geopolitical tensions, particularly in the West Asia, could delay or dilute the pace of recovery.
From a strategy perspective, this PB breadth indicator serves as a useful contrarian tool. It helps identify phases of market stress where valuations become attractive on a broad basis. Investors can use this signal to track bottom formation and prepare for potential upside, rather than attempting to time exact reversals.
Overall, the setup indicates early signs of value emergence, with improving risk-reward in the microcap space.
(Disclaimer: This article is by Raj Gaikar, research analyst, Samco Securities. Views expressed are his own.)
