Is the selling driven by the imposition of Long-term Capital Gains Tax ? Is it due to fears about political instability if the BJPO cannot maintain its grip on power? Is it due to fears sparked off by the unearthing of various scams? We don't know for certain though these are all probable causes. If it is about potential political instability for example, the volatility will be linked to news flow about upcoming assembly elections, starting with Karnataka.
It’s not so easy to track retail investor attitude directly. However, we can infer retail attitude from several publicly available data-sets. For example as above, we can compare the net institutional investment numbers with market movement. If net institutional numbers (DIII and FPI) in aggregate are positive, but the market is falling, retail is selling. If net institutional numbers are negative but the market is rising, retail is buying.
Breadth can be incorporated into this simple observation. Retail investors focus on smaller stocks and if breadth goes negative, in a market where major indices (the Nifty, the Nifty next 50, and the Sensex) are rising, retail is selling. The breadth and net institutional positions are reported on a daily basis. It probably makes sense to smooth out data by taking 5 day averages or perhaps 10-day averages. That way, the impact of single session volatility can be reduced.
Retail investors enter the market directly with equity purchases and also via equity mutual funds. One way of tracking changes in attitude is changes in mutual fund inflows. Fund inflows are more stable than equity buy/sell numbers because most investors take SIPs for periods of a quarter, or six months to a year, or longer. So, it is trickier to make sense of this. Fund inflows are reported with approximately a month's lag. But, we can compare quarter by quarter numbers.
Through February, institutional attitudes were net positive to the tune of Rs 68 billion but the Nifty fell by 3.5 per cent. In March as mentioned above, the net institutional attitude remained positive but the Nifty fell another 3.6 per cent. Fund inflows remained positive in February but that may be due to prior commitment of SIPs. March inflows were probably positive as well but we don't have numbers yet.
April fund data will be very interesting since that's the new fiscal. If April inflows dip, we'll get a sense of long-term changes in retail attitude. Given the major influence of retail investors in aggregate, understanding their attitude could be very important when it comes to calling market trends.