Can smallcap stocks crash trigger a capitulation phase? What analysts say

The smallcap meltdown continues, raising concerns of a full-blown capitulation

Smallcap stocks have come under intense selling pressure over the past few months, with the Nifty Smallcap 100 and the Nifty Smallcap 250 indices on the National Stock Exchange slipping into a bear phase (a fall of over 20 per cent from their respective peak levels) last week.

 

The Nifty Smallcap 100 registered its lifetime high at 19,716 on December 12, 2024, and has since tumbled 23.7 per cent (4,672 points) to a low of 15,044 in intraday deals on Monday. Meanwhile, the Nifty Smallcap 250 has crashed over 24 per cent from its peak on September 27, 2024, to a low of 14,145 on Monday.

 

Nearly 60 per cent of the Nifty Smallcap 250 stocks registered a steeper loss than the BSE SmallCap 250 during this period. The sharp fall over the past few months, analysts said, could trigger a capitulation phase in smallcap stocks as investors rush to cash out, protect their capital, trim losses, and shift to a safer haven.

 

By definition, ‘capitulation’ refers to a phenomenon where investors liquidate their positions during an extended stock price decline for fear of incurring bigger losses. This panic selling may also be triggered by margin calls and increased futures and options (F&O) margins. On the other hand, some believe that capitulation can lead to an exhaustion of selling pressure, creating a fresh buying opportunity.

 

 

“The fall in the smallcap index from its peak has been sharp, pushing it into a bear phase. That said, I do not rule out a pullback rally, though it should be short-lived. Compared to their midcap counterparts, smallcaps still look vulnerable and could fall further, potentially leading to capitulation. At the index level, we could see a 5-8 per cent drop in smallcaps, with individual stocks slipping much more,” said Ajit Mishra, senior vice-president for research at Religare Broking.

 

Mishra sees support for the Nifty Smallcap 100 at 14,950 and 14,400 levels, while any rise is likely to face resistance at 15,670 and 16,200. Capitulation, meanwhile, is also influenced by various market factors, including foreign institutional investor inflows and outflows, fear of missing out, and broader sentiment. Such phases can last for days to months and may have a sizeable impact on investments. Investors also tend to shift from one asset class to another during such times, moving from equities to bonds, commodities, or currencies, which could further disrupt market stability.

 

Sharp underperformance

 

Amid the decline, a majority of Nifty Smallcap 100 stocks have underperformed, registering steeper losses than the smallcap index. Smallcap stocks such as Sterling and Wilson Renewable Energy and Jupiter Wagons were among the biggest losers, down around 45 per cent in just over two months.

 

Data from ACE Equity shows that 28 out of the Nifty Smallcap 100 stocks — almost one in every three —declined over 30 per cent during this period. Prominent losers included Tejas Networks, Natco Pharma, BEML, Data Patterns, NCC, Sonata Software, KEC International, CESC, Angel One, Ircon International, Cyient, RailTel Corporation of India, HFCL, RITES, PVR Inox, and IFCI.

 

According to Chokkalingam G, founder and head of research at Equinomics Research, the sharp fall in the smallcap segment has created a dichotomy within the space. Certain pockets, such as new-age companies, digital businesses, and renewable power firms, had reached extraordinary valuation multiples at their peak.

 

“Most of them have seen a severe correction, but many still trade at elevated levels. As a result, smallcap stocks remain priced well above the BSE Sensex’s trailing price-to-earnings (P/E) ratio. A large number of smallcap stocks with high P/E multiples may see further pain over the next six weeks,” he said.