🚀 Stock Market Warning! The End of a Mega Rally? Find Out Now!

The recent surge in mid and small-cap stocks seems to be coming to an end, as both midcap and smallcap indices have experienced a significant decline. About 90 percent of these stocks closed lower, marking the largest single-day drop of the year. The Indian stock market has witnessed a noticeable divergence, with a gap of over three percent between the Nifty and Midcap index, the largest difference in three years.

The Nifty Midcap 100 index settled at 40,170.30, down 3.07 percent or 1,273.90 points, while the Nifty Smallcap 100 index plummeted by 4.10 percent, closing at 12,450.20 on Tuesday.

In 2023, the Nifty Midcap and Nifty Smallcap indices had surged by nearly 27 percent and 28 percent, respectively, compared to a 10 percent rise in the Nifty. These indices have consistently outperformed benchmark indices for seven consecutive months through September.

Over the past year, the Nifty Midcap and Nifty Smallcap indices have also shown impressive gains, rallying by nearly 24 percent each, in contrast to the 10.64 percent increase in Nifty50.

Sandeep Tandon of Quant Capital believes that mid-caps and small-caps may see profit-booking in the near term due to excessive enthusiasm in certain segments, prompting investors to shift their focus towards large-cap stocks.

What should investors do at this juncture? According to Omkar Kamtekar, a Research Analyst at Bonanza Portfolio, retail investors have enjoyed substantial returns, particularly in midcap, small-cap, and micro-cap categories, since the new fiscal year began. Despite stocks rallying more than 100 percent in some cases, there is a prevailing fear of missing out (FOMO) among retail investors. This FOMO is evident in the increased allocation of investments towards midcap and small-cap categories, as reflected in the rising number of folios with asset management companies (AMCs).

Kamtekar advises that to build long-term wealth, it’s crucial for investors to invest at reasonable valuations and maintain consistency. At present, midcap and small-cap stocks seem to be trading at premium valuations, making incremental investments at these levels potentially counterproductive. Therefore, Kamtekar suggests it would be wise to stay invested and book profits, as “booked profit is better than paper profit.”

He also emphasizes that the fundamentals of the Indian economy remain robust, with India expected to be a driver of global growth in the long run. From a short-term perspective, political risk is the only potential trigger for a significant market correction. Therefore, investors should closely monitor the upcoming state elections in Chhattisgarh, Madhya Pradesh, Rajasthan, and Telangana before the General Election in 2024.

As for trading these stocks, Ajit Mishra, SVP of Technical Research at Religare Broking, notes that there are technical indicators suggesting the possibility of continued profit-taking. He points out that the trend line resistance on the weekly chart, combined with the gap between the indices’ levels and the short-term average (20 EMA), supports this view. Mishra recommends investors to book partial profits and maintain trailing stop losses in their existing trades. For new purchases, he suggests waiting for the indices to retrace towards key support levels and gradually accumulating fundamentally sound stocks.

Vinod Nair of Geojit Financial Services highlights the rising pessimism in the stock market, leading to a cautious approach in booking profits, based on the perception that valuations have exceeded reasonable levels.”

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