Mid-, small-cap indices crack up to 5% in two sessions; analysts recommend key trading levels

BSE Midcap plunged 2.5 percent, while the BSE Smallcap crashed by a staggering 3.5 percent.

The stock market witnessed a sharp sell-off on October 22, as benchmark indices Sensex and Nifty fell up to 1.25 percent amid heightened volatility. However, it was the midcap and smallcap stocks that bore the brunt of the major decline, with the broader market indices taking significant hits.

The Nifty Midcap 100 index plunged 2.61 percent, while the Nifty Smallcap 100 suffered a severe blow, crashing 4.10 percent during intraday trade before marginally recovering to close 3.92 percent lower. On the BSE, the Midcap index declined 2.5 percent and the Smallcap index dropped 3.5 percent.

This sharp correction in midcap and smallcap stocks extends their recent underperformance. The Nifty Midcap 100 has dropped 6 percent over the last four trading sessions with a minor rebound of 0.31 percent on Friday. In the last two sessions, it declined nearly 5 percent. Similarly, the Nifty Smallcap 100 is down 6.63 percent in the past three sessions, with a modest gain of 0.06 percent on Friday. In the last two trading sessions, it declined over 5 percent.

The Nifty advance/decline ratio fell to 1:8, indicating widespread selling. Analysts pointed to a combination of global and domestic factors contributing to the bearish sentiment.

Market experts suggest that midcap and smallcap stocks could continue to underperform in the near term. Ruchit Jain, Lead Researcher at 5Paisa.com, noted that "until we see signs of a trend reversal, midcaps and small caps are likely to remain under pressure". He added that the Nifty Midcap 100 index has breached its 100-day EMA support, and based on retracement levels, it could correct further to 55,580 in the short term.

Foreign institutional investors (FIIs) have withdrawn nearly Rs 81,000 crore from Indian equities in October alone. Concerns over China's economic stimulus, the overvaluation of Indian stocks, weaker corporate earnings and a stronger US dollar affecting emerging markets have spurred this exodus.

Adding to the pressure is the recent surge in US bond yields, which has dampened expectations of aggressive interest rate cuts by the US Federal Reserve. This has led to a tightening of fund flows to emerging markets, including India.

Rajesh Agarwal, Head of Research at AUM Capital, highlighted the persistent FII outflows, rising valuations of mid and smallcap stocks, and growing geopolitical tensions as key factors weakening investor sentiment. "Midcap stocks typically face selling pressure during market corrections, but with careful selection, they can offer better long-term returns," he said.

Despite the ongoing correction, some analysts remain optimistic about the broader outlook for midcaps. Rakesh Vyas, Co-Chief Investment Officer at Quest Investment Advisors, pointed out that the midcap index is still up approximately 30 percent year-to-date (CYTD), trading at a premium to large-cap stocks due to expectations of stronger earnings growth. "Of the over 50 midcap stocks that have dropped more than 20% from their 52-week highs, nearly 60% are still delivering positive returns," Vyas noted.

Sheetal Malpani, Chief Investment Officer at Tamohara Investment Managers, warned that the earnings outlook for small and midcap companies may be revised downward in the coming quarters. "This is the primary reason for weaker sentiment in the mid and smallcap space, which has seen a significant run-up in the past six quarters," he said.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.