The index is currently trading at 4,780 and chances of heading towards 5,200 are bright
Experts make money from mid-cap stocks. They buy a bunch of stocks from the mid-cap segment and hold them till they feel there is "certainty" in the market.
These stocks are generally low in market-cap and thus, less liquid. Hence, the exchange asks brokers to collect higher margin. If the cost of carry (interest rates) goes up, it impacts the exposure of mid-cap stocks adversely and experts start exiting these stocks.
One should always give due respect to liquidity, in terms of rupee, as it inversely correlates to the trend and emotions of the market.
Excess liquidity means market participants are pessimistic, and a shortage of liquidity hints at optimism in the market.
Optimistic market participants represent the group of greedy people and pessimistic participants represent the group of fearful participants in the market.
Investing in mid-cap stocks is nothing but betting on themes that make it a costly instrument in a rising interest rate regime for investors as most of them run on high debt, which is the reason why liquidity-related issues cause these indices to form an early bottom or a top.
However, in an uncertain market, they initially lag and later outperform.
In 2018, we all witnessed a similar type of trend and the Nifty Midsize Capital 50 index failed to form a new high when the Nifty made a new high.
The Nifty Midcap index made a higher low as compared to Nifty at around 10,000.
If we correlate the performance of the Nifty Mid-size Capital 50 index with the cost of carry, the liquidity crunch issue started in January 2018, and in the month of October, RBI took the decision of reining in rising interest rates.
Later, a fall in crude prices and a substantial jump in the Indian rupee helped our economy through lower inflation and import bills. These factors are positive for parking funds in mid-cap companies and now, as there is more certainty, mid-cap indices should outperform.
Technically, the above-mentioned data on correlation helps us fine-tune our entry and exits in mid-cap indices. Nowadays, a number of funds and ETFs are available for taking on direct exposure in such indices.
One can even invest in those sectors/stocks that are major contributors to such indices. Till the results of the 5 state elections are out, we are of the view that Nifty could underperform because of the uncertainty and that the Nifty Midcap 50 could outperform, as stock specific action could lift bullish sentiment dramatically.
Based on charts, we expect a minimum 8-10 percent up move in the Midcap index in the next few weeks. The index is currently trading at 4,780 and chances of heading towards 5,200 are bright.Disclaimer: The author is a senior VP (technical research), Kotak Securities. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.