If weakness continues, past year's market rally could get negated, says this fund manager  

Yesterday we got a signal but we will have to see when and how the confirmation comes, Mehta says.

Umeshkumar Mehta, the fund manager and chief investment officer of Samco Mutual Fund, is closely monitoring market signals following yesterday's sell-offs. The Nifty Midcap 100 index fell 4.5 percent from its day's high on December 20, marking the biggest single-day decline since October 2023. Meanwhile, the Nifty Smallcap 100 index dropped 5 percent from its day's high to a low of 14,951. Mehta warns that if this trend persists, it could reverse the entire one-and-a-half-year rally.

Also read | Small, mid-caps contribute to 50% of overall market-cap erosion on December 20

Edited excerpts:

How do you view yesterday’s corrections?  

So far, there aren't any momentum sell signals just because of yesterday's fall. But we have been seeing the sell signal rising for the last three to four weeks - the propensity of stocks to move higher was reducing in small caps and micro caps, the breath was slowly deteriorating and yesterday was that culmination of that and possibly the beginning of markets showing some weakness. If this weakness continues, there will be sell signals in the momentum stocks and stocks like defense, PSU, Railway etc., the stocks that were the talk of the town will see deceleration in their momentum.  Yesterday, the first blip happened, and that has happened with volumes. At an aggregate level, the market looks like there is substantial profit booking. Although this does happen in an ongoing bull market, this time, this correction, if it lasts could correct the entire rally of one and a half years.

What is the timeline that we're looking for this kind of impact and how are you preparing for that? 

Ideally, it will take around a week or two before the confirmation that the market has entered into a long-term correction. We can confirm or corroborate the underlying shift in the trend in the momentum stocks only thereafter. Currently, things are still okay, but we have to certainly be watchful and mindful.

Are there any other trends that are emerging in your quant models?  

When we look at the market as a whole, certain laggard stocks, which did not participate in the rally till October 2023 have started to move up in the last three to four weeks.

Also read | Does the recent sell-off indicate a reversal in the small-cap tide?

Which are these laggard stocks you are referring to? 

Large-cap stocks. This time the tide has reversed. There was a time when the entire US market was driven by FAANG stocks; the larger market did not perform. Similarly, this time, micro-caps, small-caps and mid-caps performed and certain large-caps that were index heavyweights were not performing. But now all those names are also participating in the rally over the past four weeks. That gives us the confidence that everything has to culminate at or near the top and I think that is how tops get culminated. Yesterday we got a signal but we will have to see when and how the confirmation comes.

Where are you seeing clear Sell signals? 

We got a Sell signal in one or two stocks but I would not call them material. Going forward, if we get a barrage of Sell signals then it will be a sign of worry. Having said that, signs of euphoria are visible in the market. The number of IPOs that are coming every day and the rising number of QIPs that are taking place with promoters diluting their stake suggests a euphoria. This kind of exit usually happens at the top. I would still say, there is still a little bit of time before the signals finally turn red.

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