War jolts mid, small caps most; what's way ahead for investors?

The Indian stock market came under intense selling pressure as escalating war tensions spooked investor confidence, with the benchmark indices Sensex and Nifty 50 tumbling more than 2 per cent in intraday trade today. As of 2:30 PM, the BSE Sensex was down 0.9 per cent at 79,489, while the Nifty 50 slipped 1.1 per cent to 24,580. However, the damage was far more severe beyond the frontline indices. Mid and small-cap stocks witnessed heavy selling as investors rushed to trim exposure amid rising uncertainty. By 2:30 PM, the Nifty Midcap 100 and Nifty Smallcap 100 indices were down over 2 per cent each.

 

The market breadth reflected the weakness as only seven stocks advanced while 93 declined in the midcap pack. The trend was similar in smallcaps, where just 10 stocks gained and 90 moved lower.

The recent slide has been swift in both mid and smallcaps. Over the past three sessions, both the midcap and smallcap indices have dropped more than 5 per cent each, compared with a decline of over 4 per cent in the benchmark indices during the same period.  From their respective 52-week highs, the midcap index is now down over 8 per cent, while the smallcap index has corrected more than 16 per cent, underscoring the heightened selling pressure in the broader market.

Analysts said that mid and small cap stocks are currently absorbing the impact of a broad-based domestic and global sell-off.    Sunny Agrawal, head of fundamental research at SBI Securities, said that the mid and small caps are bleeding right now, tracking a bearish trend in the markets as the situation worsens in West Asia. He said that investors should focus bottom up stock picking in the mid and smallcaps as valuations have turned comfortable.

"Few preferred sectors are auto ancillary, power ancillary, discretionary consumption, recycling, structural steel tube, defence, PSEs," he said.

Adding to the concern is the broader risk environment. India VIX has jumped sharply, up more than 20 per cent to cross the 17 mark, indicating rising nervousness among traders.  Analysts said that developments involving the US and Israel indicate a possibility of easing tensions by March, suggesting that the current stress may not persist over the medium term, though near-term volatility is likely to remain elevated.

"A primary factor is full control and opening of the Strait of Hormuz, which will swiftly reverse the weak sentiment and market sell-off. We advise to avoid panic selling, have a long-term perspective and exercise patience, as current price levels may offer a strategic entry point for medium to long-term investors," Vinod Nair, head of research, Geojit Investments, said. 

'Mid, small caps below 200-day SMA'

According to Sachin Gupta, vice president, research, Choice Broking, said that what was once a 'buy on dips' market has now shifted into a far more cautious setup. From a technical perspective, the damage is visible as both indices are trading well below their 200-day Simple Moving Averages.

In particular, the Smallcap 100 has broken below the 16,800 zone, which had acted as a strong structural support, he said.

"When long-term supports are breached like this, they often turn into resistance on pullbacks. The formation of a “death cross” on the daily charts further reinforces that momentum has decisively weakened," he said. The RSI (14) on the Smallcap index has slipped toward 32, indicating that the market is approaching oversold territory, but oversold conditions do not automatically signal a reversal.

"So far, there are no clear reversal patterns or strong demand signals visible on the charts. The market still appears to be searching for a bottom. On the downside, the Nifty Smallcap 100 has support around the 15,800 mark, while the Nifty Midcap 100 has support near the 56,000 level," the analyst said. 

'SMIDs may outperform'

On the earnings front, ICICI Direct's Pankaj Pandey said that both the small and mid cap witnessed over 20 per cent growth in Q3, aided by the commodity segment. On a medium to long term, "we see mid and small caps outperforming the large cap peers".

He, however, said that the recent US-Iran conflict led uncertainty will impact certain pockets while sentimentally weighing on the overall broader markets. "The recovery in the broader markets will be a function of duration of the conflict, amidst volatility in the interim period."

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