200-DMA divide widens: Large caps hold strength, small caps lose ground

The 200-day moving average, drawn from the average closing price of the past 200 sessions, serves as a crucial gauge of market trend and sentiment

A widening divide is emerging across India’s equity markets, with large caps continuing to command investor confidence even as broader segments lose momentum. The Nifty 50 remains a picture of resilience, backed by the strength of its constituents, with nearly 85 percent of stocks in the index trading above their 200-day moving average.

In stark contrast, only about half the stocks in the Nifty 500 and BSE MidCap indices remain above this key trend indicator, while weakness is far deeper in the BSE SmallCap index, where more than 63 percent of stocks continue to trade below their 200-DMA.

The 200-day moving average, drawn from the average closing price of the past 200 sessions, serves as a crucial gauge of market trend and sentiment. Stocks trading above this level are often viewed as being in bullish territory, though analysts warn that excessively high readings can flag over-exuberance.

Akshay Chinchalkar of Axis Securities said the current breadth divergence signals a challenging phase for the market. With the Nifty touching fresh highs while mid- and small-cap indices lag, he said it points to a clear rotation into large caps. Investors are steering away from high-beta and riskier pockets, implying expectations of near-term volatility shaped partly by the outlook on Federal Reserve and RBI policy for 2026, which in turn hinges on the inflation trajectory.

Still, the Nifty has shown little sign of fatigue. The index is hovering close to its lifetime high after rising 1.9 percent in November, outpacing the BSE 500’s 0.9 percent gain and the BSE MidCap’s 0.4 percent rise, while the BSE SmallCap index slipped 3.4 percent for the month.

The performance gap is even wider on a year-to-date basis: the Nifty has climbed nearly 11 percent in 2025, compared with a 6.7 percent rise in the BSE 500 and a modest 1.7 percent gain in the BSE MidCap, even as the BSE SmallCap has declined 5.7 percent.

Independent analyst Deepak Jasani noted that buying interest continues to gravitate toward large caps and stronger midcaps offering better earnings visibility, corporate governance and deeper liquidity — qualities that offer investors comfort in uncertain phases and smoother exit options. Should market conditions remain supportive for a longer stretch, he added, the risk appetite may broaden and spill into segments currently under pressure.

Even as investors rotate toward stability, analysts caution that valuations across the Indian market, though moderating from their September 2024 peak, remain elevated compared with pre-pandemic levels. Roughly 36 percent of NSE-500 stocks still trade above 50 times earnings — far higher than the pre-COVID reading of 16 percent, though below the frothy 50 percent peak seen last year.

“Valuation froth may have come off the top, but the market is still priced well above long-term norms,” Equirus Securities said in a recent note. The brokerage added that the risk–reward balance continues to favour large caps and quality compounders, whose valuations remain closer to historical ranges, while mid- and small-cap stocks trading above 50 times earnings are vulnerable to even modest earnings disappointments. A broad-based re-rating from here, it said, will depend on meaningful earnings upgrades rather than another bout of valuation-driven enthusiasm.