Nifty Midcap 100, Smallcap indices fall over 2% after US Fed rate cut; 87 of 100 midcap stocks trade in red

"Technically, there is negative divergence that has formed where Nifty Midcap index has made higher highs. But RSI has made a lower high, and such negative divergence is probably a short-term correction. We expect a corrective phase in the mid-cap in near-term," said Ruchit Jain, Lead - Research, 5Paisa.com.

He advised traders to avoid bottom-fishing. "In the mid-cap space from a short term perspective, we could see some more dip before the segment stabilizes," said Jain. The immediate support for Nifty Midcap 100 index is at around 58,500. If index breaks below this level, then it could fall further to 57,700 in the short term, he added.

In the last few weeks, broader markets have seen a good run-up, especially the mid and the small-cap stocks, which have seen significant gains. Long positions built up mainly in anticipation of the US Fed rate cut, which was finally delivered yesterday.

The US Federal Reserve cut its benchmark interest rate after more than four years. "What's happening is that the positions were built in anticipation of any such big event. So after the outcome of the event the markets are witnessing profit booking as traders start unwinding these positions," Jain noted.

Vinod Nair, Head of Research, Geojit Financial Services noted a larger-than-anticipated 50-bps rate cut by the Fed has introduced a note of caution in the domestic market, with concerns about a potential slowdown in future economic growth. Should this materialize, it could adversely affect the financial performance of mid- and small-cap stocks, which are currently trading at premium valuations. In contrast, large-cap stocks, with their more favourable valuations and business stability, are better positioned to weather a global economic downturn.

Defensive segment to rally?

Nair believes the global slowdown is unlikely to affect domestic consumption, particularly rural demand, which is expected to thrive due to favourable monsoon conditions, easing inflation, and increased government spending. Like the ongoing global currencies volatility is least expected to impacted them. In fact, they stand to benefit from anticipated lower inflation and steady demand, leading to improved profit margins. Investors are increasingly drawn to sectors with stable earnings growth, particularly the FMCG sector, which offers such prospects.

Asian markets have responded favourably to the 50-bps rate cut and accommodative monetary policy, expecting an improvement in FII inflows. India is likely to experience similar benefits in the short to medium term, although it currently remains in the background due to its elevated valuations, he added.

Sreeram Ramdas- Vice President at Green Portfolio PMS said the long term neutral rate is expected to be higher than what was anticipated before the meeting. The correction we are seeing is valuations falling from sky high levels in small and mid-caps which is well deserved.

The brokerage Nuvama Instituinal Equities said the Midcap100 remains in a long-term uptrend but is losing steam as momentum indicators are coming out of extreme overbought condition.

"The ratio chart of the Midcap100 against the Nifty50 has tested its long-term rising channel resistance zone and has retreated from its recent high, indicating short-term underperformance of the Midcap Space vs Large Caps," it said.

The analysts at the brokerage said the Midcapcap100 index may experience 5-10 percent decline on violation of the 58,000 support level. While the support level is 19,00 for the Smallcap 100 and 24,600 for Microcap250.

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