85% of mid, smallcaps appear bullish on the charts. Will the trend sustain?

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After a brief lull in the February – March period after the market regulator Securities Exchange Board of India (Sebi) raised concerns and directed Asset Management Companies (AMCs) to conduct stress tests, the mid-and small-cap stocks have never looked back.

Around 85 per cent of the broader indices constituents’ are now trading above their respective long-term moving averages. A total of 131 stocks out of the 150 that comprise the Nifty MidCap 150 index are trading above their 200-DMA. In the case of the Nifty SmallCap 250 – as many as 211 stocks hold above the long-term moving average as of date.

The Nifty MidCap 150 index has rallied 43.7 per cent in the year 2023, and has galloped 171.8 per cent since the start of 2021. The index hit a life-time high at 21,369 on July 05, 2024.

Similarly, the Nifty SmallCap 250 index has surged 26.1 per cent so far in 2024. The index was up 48.1 per cent in 2023, and has zoomed 191.5 per cent since 2021. The Nifty SmallCap 250 index registered a new summit at 17,749 last Friday.

While the Nifty MidCap 150 index has rallied over 20 per cent post March 2024, the Nifty Smallcap 250 index has gained over 24 per cent during this period. Both the indices have outrun the Nifty 50, which has gained 8.9 per cent since then, shows data.

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The 200-DMA for the Nifty MidCap 150 index stands at 17,455 – the index is quoting 22.3 per cent higher compared to the long-term moving average. Meanwhile, the Nifty SmallCap 250 index is quoting 23.2 per cent higher when compared with its 200-DMA at 14,371, technical charts suggest.

Over the past few months, analysts have been advising caution on the mid-and small-cap segments amid lofty valuations, and suggest investors stick to the large-caps for now. While the markets, they said, are likely to do well amid a supportive economy, corporate earnings, they feel, now need to catch up to justify the valuations.

“Our investment committee remains constructive on India’s macroeconomic environment and believes the robust economic growth fundamentals should support corporate earnings. That said, large-caps offer a more attractive risk-reward proposition compared to the overvalued mid-and small-cap space. We remain highly selective in this area and recommend further weight reduction in favor of large-caps,” said Jitendra Gohil, chief investment strategist at Kotak Alternate Asset Managers.

Key levels to watch

At the current levels, the Nifty MidCap index is seen treading along the higher-end of the Bollinger Bands (anticipated trading range) on the daily, weekly and monthly scale. The daily chart suggests breakout and sustained trade above 21,430 levels can trigger a surge towards 21,800 levels.

On the flip side, failure to sustain above 21,300 levels, can see the index re-test last week’s low of 20,500 levels; below which the next key support stands at 20,000-mark.

The Nifty SmallCap index has given a breakout on the weekly scale. The near-term bias is likely to remain upbeat as long as the index sustains above 17,570 levels. On the upside, the index can spurt to 18,200 – 18,400 levels. Failure to hold the support could see the index drift to 16,900-odd levels.

“The frontline indices are now unable to stick to higher levels. A similar trend is visible in the mid-and smallcap segments, which have seen a very strong traction last week. The upcoming results season and the budget will see stock specific moves. There can be some cool-off once the budget is announced. One needs to stay very cautious in the mid-and smallcaps. The Nifty Midcap 100 index can drop to 55,800 – 56,000 levels. A breach can take it further down sharply,” said Osho Krishan, Senior Analyst – Technical & Derivatives, Angel One.

First Published: Jul 08 2024 | 10:29 AM IST