It’s time for smallcaps and midcaps to take a break as largecaps are ready for revenge

The Nifty50 index rallied continuously for 5 months from March’23 to July’23. Since 2010, there have been only 4 instances where the index has rallied continuously for 5 or more months.

As shown in the table below, the Nifty50 has yielded double-digit returns in all of these periods with the average return being 23.08%. In the next 6 months, the broader index enters a consolidation phase giving modest returns of 0.58%.

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Here’s how the Nifty Midcap 100 Index and the Nifty Smallcap 100 Index returned during this period.

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The Nifty Midcap 100 Index and Nifty Smallcap 100 Index have always outperformed the Nifty50 index surging on an average by 30.50% and 30.80% respectively. However, unlike the Nifty50 index which enters a consolidation phase, the Nifty Midcap 100 and Nifty Smallcap 100 indices continue their upward rally, soaring with average gains of 6.30% and 8.10% in the next 6 months.This time, the Nifty’50 returned 9.98% in the next 6 months from Aug’23 to Jan’24. However, the Nifty Midcap 100 and Nifty Smallcap 100 soared 28.76% and 36.94% respectively, outperforming the Nifty50 index.

But, what happens after this period?

In the next 6 months following this period, the Nifty50 has delivered a return of 4.02%. After the consolidation phase of 6 months, the Nifty50 starts its upward rally.

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However, the Nifty Midcap 100 and Nifty Smallcap 100 which outperformed the Nifty50 in this period either generated negative returns or moved into a consolidation phase in the next 6 months.

While the Nifty50 has rallied on average by 4%, the Nifty Midcap 100 falls 7.17% while the Nifty Smallcap 100 yields flat returns implying that the Nifty50 outperforms the Midcap and Smallcap index.

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Moreover, amidst the current ongoing rally, large-cap stocks have underperformed significantly when compared to midcap and smallcap stocks. These midcap and smallcap stocks are currently trading at rich valuations.

However, given that much of the anticipated future growth seems to be already factored into their prices, the margin of safety at current levels has diminished in comparison to the more favourable valuations offered by large-cap stocks.

Therefore, this would still be a favourable time for investors to invest in large-cap stocks. Investors should keep a watch on companies that are fundamentally strong with healthy growth prospects.

Technical Analysis

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Last week proved to be exceptionally positive for Nifty, culminating a remarkable 1.19% gain ending at 22,041. The Nifty50 maintains its position above the 20 and 50 Simple Moving Averages (SMA), with the Relative Strength Index (RSI) standing at the robust 60 level. Technically, the 21,650 level is identified as a formidable support while resistance levels stand at 22,222 and 22,350.

In the broader indices, the midcap segment has exhibited a strong recovery exhibiting renewed strength, particularly in Auto, PSE, IT, and PSU banking stocks.

The current stability and gradual ascent in the US and European markets contribute positively to the global sentiment. A moderate swing in the Index is anticipated as long as the India VIX, the fear gauge, remains below 16 levels.

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