Can the sell-off in mid, smallcap stocks spread to the large-cap universe?

Most analysts, however, do not think so as they expect a minor dip and a sharp recovery as investors flock to the large-caps in search of safety and value buying as the mid-and small-caps falter.

Tracking losses in the broader market that has seen the Nifty Smallcap 250 index and the Nifty Midcap 100 indices slip 9 per cent 6.1 per cent in the last three sessions, the frontline Nifty 50 index has remained resilient and registered a fall of 2.2 per cent during this period.

Going ahead, can the nervousness in the mid- and small-cap universe spread to the large-cap peers?

Most analysts do not think so. They expect a minor dip and a sharp recovery as investors flock to the large-caps in search of safety and value buying as the mid-and small-caps falter.

“Historically when the mid-and small-caps have seen a sharp decline, investors have opted for safety and shifted to the large-cap stocks. This time too, they are likely to adopt the same strategy. At best, the Nifty50 index can slip up to 3 per cent from the current levels given the developments and the fact that we are approaching financial year end and the upcoming expiry of futures & options contracts for the March series,” said G Chokkalingam, head of research at Equinomics Research.

Meanwhile, the Nifty 50 has witnessed four interim corrections in the last four-year rally. The first notable correction was between February 2021 - April 2021, wherein the Nifty consolidated and slipped 8.3 per cent. This was followed by a longer time- and price-wise correction in the period October 2021 - June 2022, wherein the Nifty declined 18.4 per cent from its then high in the eight month period.

The third notable corrective phase was 8.1 per cent fall between December 2022 high and March 2023 low. Followed by another minor sideways consolidation from July - October 2023, during which period the Nifty slipped 5.8 per cent.

Even though the Nifty 50 has slipped 2.3 per cent in the last three trading sessions, the index is still up 1.2 per cent for the calendar year 2024 (CY24), and a solid 26.8 per cent for the fiscal year 2023-24 (FY24), shows data.

That said, V K Vijayakumar, chief investment strategist at Geojit Financial Services, however, feels that there is room for the broader market to correct more from here on since the valuations continue to be elevated. Investors, he suggests, should now focus on large-caps and quality midcaps.

“The (market) turbulence will give cherry picking opportunities. From now on, irrational exuberance will take a back seat and rational valuations and quality will be the driving force. This turbulence will separate the men from the boys. High quality private sector banks and the leading names in capital goods, telecom and autos can be accumulated in a calibrated manner,” Vijayakumar said.

Technical view

On the technical charts, however, the Nifty 50 is seen struggling above the higher-end of the anticipated trading band on the monthly scale for the third consecutive month. The higher-end of the Bollinger Bands on the monthly chart suggest resistance around 22,320 levels for the index.

The key momentum oscillators such as the RSI (Relative Strength Index) and the Stochastic Slow are showing signs of tiredness on the monthly scale. The index, therefore, may witness consistent selling pressure at higher levels. The monthly MACD (Moving Average Convergence-Divergence), however, seems favourable.

A monthly close below the 22,320 level, could in way confirm at least one of these - if not both. The Nifty 50 can slide towards its trend line support which stands at 19,450 levels – down 13.7 per cent from its recent top of 22,527 levels, as per technical charts. CLICK HERE FOR THE CHART

“A 'Rising Wedge' breakdown on the Nifty's daily chart, coupled with negative divergence on momentum indicators, suggests challenging times for bulls in the short-term. Consequently, more downward movement is expected, and traders are cautioned against attempting to catch the falling knife. Any minor rebounds should be viewed as opportunities to lighten long positions and potentially initiate short ones," advised Sameet Chavan, head of technical and derivative research at Angel One.