Midcaps and smallcaps enter 'correction' zone, Nifty 50 on the cusp

Both the mid- and small-cap gauges were down 10 per cent intra-day over their 2022 highs before recovering some lost ground

The Nifty Midcap 100 and the Nifty Smallcap 100 index on Thursday briefly entered ‘correction territory’, while the Nifty50 index came close to doing so.

On Thursday, Nifty50 hit an intra-day low of 16,867, the Nifty Midcap 100 fell to 28,954, and the Nifty Smallcap 100 dropped to 10,793. This is a sharp fall from the respective 2022 highs these indices hit on January 17 — 18,308 in the case of the Nifty50, 32,041 for the Nifty Midcap 100, and 11,981 for the Nifty Smallcap 100.

A correction is defined as a decline of 10 per cent or more in the price of a security from its most recent peak. Both the mid- and small-cap gauges fell 10 per cent intra-day over their 2022 high, before recovering some lost ground.

The Nifty50 slipped as much as 8 per cent from its 2022 highs, before recouping some losses to end at a 6.5 per cent decline from this year’s peak. If the bearish spell continues, this will be the first time the index will plunge into ‘correction’ since March 2020.

Since April 2020, the Nifty has mostly seen shallow corrections (see table). Between April 30, 2020, and May 19, 2020, the index had almost entered correction territory. However, it recovered sharply just before it could hit a double-digit fall. Since then, the index has had small bouts of declines of between 5 per cent and 7 per cent.

From its October 2020 peak, the Nifty50 and the mid- and small-cap gauges have declined over 10 per cent at present. However, in the interim the indices have seen a sharp rebound and for this study we have looked at sustained falls without a sharp recovery.

India’s performance is still better than some Asian peers. Countries like China and South Korea have entered bear markets, which signals a fall of over 20 per cent, while Australia has entered a correction. The MSCI Asia Pacific Index is down nearly 17 per cent from its recent peak.

The latest bout of selling follows anxiety caused by the US Federal Reserve’s statement that interest rates could rise as early as March to control inflationary pressures. Prospects of a steep increase in rates have pushed bond yields higher. This has prompted investors to dump risky assets.

Apart from global cues, whether Indian markets will follow Asian peers into correction will depend on the Union Budget, which will be presented on February 1.

“With the US Fed outcome now behind, domestic investors will keenly watch out for the upcoming Union Budget for near-term market direction. Technically, Nifty managed to hold the support of the previous day and saw a recovery from the lower levels. Now, the index needs to hold the important level of 17,000, for the bearishness to pause. However, volatility cannot be ruled out given big events in the near future,” said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services.

Technical analysts say the Nifty has managed to rebound from 16,900 on Thursday and also on an earlier occasion. This has become a strong support for the market.

“The Nifty has formed a double bottom, suggesting strong possibility of a fresh pullback rally from the current levels. The index has been consistently taking support near 16,900 and the momentum indicators also support a quick uptrend from the current levels. For the traders, 17,000 and 16,900 are strong support levels and above the same, a pullback rally could lift the index up to 17,250-17,350 levels. On the flip side, below 16,900, the uptrend would be vulnerable,” said Shrikant Chouhan, head of equity research (retail), Kotak Securities.