Exuberance in broader market subsides as September turns somber

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The broader expanse of the Indian stock market entered September riding a wave of optimism reminiscent of 2021.

The Nifty Smallcap 100 and Nifty Midcap 100 index entered September with gains of 22 percent each since hitting their respective 52-week lows back in middle of June. In the first half of September, the smallcap and midcap index surged 6 percent and 4 percent, respectively.

That optimism has quickly petered out with the Nifty Smallcap 100 and Nifty Midcap 100 index now down nearly 9 percent each from their highs hit earlier this month and touching distance from entering a correction territory for the second time this year.

Worryingly, individual constituents of both the midcap and smallcap indices are showing fresh signs of weakness.

Cracks on the Wall

Out of the 100 stocks part of the Nifty Smallcap 100 index, 74 stocks are now trading below their 21-day moving average while nearly 45 are below their 50-day moving average, according to data available on AceEquity.

Both the 21-day and 50-day moving averages are critical short-term indicators relied upon by technical analysts to gauge whether a stock is in a short-term downtrend or not. Importantly, the average decline in smallcap stocks that are currently under their 50-day moving average is now more than 5 percent.

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Similarly, in the Nifty Midcap 100 index, as many as 77 stocks are trading below their 21-day moving average while over 49 stocks are now below their 50-day moving average.

“While there is not much to worry from a long-term perspective, but if majority of the stocks in both these indices start to trade below their 50-DMA then there will be a cause for concern,” said Gaurav Bissa of InCred Capital.

Bissa believes there is not much concern for panic for investors in the midcap and smallcap space as the recent correction has not yet seen aggressive selling from foreign institutional investors. “When market starts to correct, midcap and smallcaps are always the first to be butchered since they are also the leaders in the rally,” Bissa said.

Foundations Strong

The sudden shift in sentiment towards smallcap and midcap stocks, usually the hunting ground of small-ticket retail investors, has been attributed to the general decline in risk appetite of investors due to heightening concerns of a global recession led by the US and Europe Union.

The US Federal Reserve’s refusal to give in to market’s view that an impending recession should merit a slower pace of interest rate hikes has forced investors to pare down their rosy view on the market.

That said, investors with a longer term horizon remain optimistic that the lack of downgrade to earnings expectations following the June quarter results and the strength of the domestic economy should provide support to the broader market.

Smallcap and midcap companies are also expected to benefit from the sequential decline in raw material prices over the past couple of months. Given that profitability of smaller companies is more adversely affected by higher costs given their lack of ability to maneuver on costs than a large-scale company, midcap and smallcap companies should see an improvement in their margins going ahead.

“Don’t think FY23 will be a bad year of earnings for companies,” Nilesh Shetty, fund manager at Quantum Asset Management said.

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