Can midcap and smallcap indices decline 5-10% from here? Rohit Srivastava explains

Rohit Srivastava, Strike Money Analytics & Indiacharts, says “March is the last month of the financial year and once profit booking has started, it will remain for a while, till the later part of the month. This is something to be aware of that the pressure may not end in a day. Will it also spread to the Nifty, that is the second question I am getting because early in the morning Nifty was not selling off and Bank Nifty is still positive today. In 2018, we saw such divergences between the Nifty and smallcap. But usually, when one is falling a lot, the other one eventually gives in.”


You have been sounding slightly cautious on the market for the last few sessions. Witnessing the broader market action today, where do you see the midcap, smallcap index setup heading? Can they decline 5-10% from here?
Rohit Srivastava: Surely, it is a reminder whether it is a stock market or a market of stocks. So, when we actually put out an outlook and people are only looking at the Nifty, then sort of they miss out what is happening below the surface, that is the participation of stocks and sectors was slowly going down over the last month or two.


This thing has taken very long to play out because since January, I have been thinking that we would start a corrective process, but it did not become so wide till now. I think February 2 is where the smallcap and midcap indices actually topped out. It has been a month since they made their top and they have not made a new high. Now the smallcap index in particular is breaking the neckline of what we call technically a head and shoulders pattern and that means that this is not the end of it because the neckline is at around 15,620 and that allows us to project somewhere down to around 14,500, so that is almost another almost thousand points maybe more down on the smallcap index pending before we get a near-term bounce possibility again building up. So, way to go.

This is the month of March also. It is the last month of the year and once profit booking has started, it will remain for a while, till the later part of the month. This is something to be aware of that the pressure may not end in a day. Will it also spread to the Nifty, that is the second question I am getting because early in the morning Nifty was not selling off and Bank Nifty is still positive today.

I did a comparison with what happened in 2018, a period where we have seen such divergences between the Nifty and smallcap. But usually, when one is falling a lot, the other one eventually gives in. So, it is not that directionally, they will not move in the same direction. If any outperformance has to happen, it usually happens when the bounce backs happen in one index bounces less than the other and sort of that is where the outperformance builds in, so that may be seen later in Nifty if at all.

But right now, the setup is for even the main indices to slowly get dragged on because imagine that whenever there are losses in the market, whether it is in the F&O space where we did have the highest futures open interest last on expiry and there is margin funding in mid and smallcap stocks, the moment there are losses, people have to fill in those losses in the other stocks by selling their other holdings which is in largecaps and that is one of the reasons why pressure usually builds up on all segments at the same time.

Purely on a one year chart, from where do you see the supports on the smallcap index and the midcap index?
Rohit Srivastava: Already, I gave you a level on the smallcap. If I take a slightly longer-term picture, one year,, it may be hard to digest if I really get too bearish. But if we just go by the weekly averages, what I spoke of is closer probably to the 20-week average, which is at 14,930. But if we go all the way back down to 40-50-week average, that will be closer to around 13,700. That is on the Nifty Smallcap 100. A similar level on the midcap 100 would be around 42,500. I think those are slightly broader levels that we should start thinking about.

What is your take on MGL and IGL and LTFH and Aditya Birla Capital? These are two big baskets, the city gas distributions and the NBFCs. Which are the stocks that you would look at buying on these dips?
Rohit Srivastava: My view of the way these chart patterns are set up right now is not to be looking at buy on dip scenarios yet. Let us get there. We do not know what is really happening. The NBFC space is actually speaking even though the ones that have come to limelight recently on regulation, we have actually not seen great performance even by the big ones, say Bajaj Finance or Finserv have not been going up. They have been making newer lows every day even as the market was trying to hold up.

So, there was already a weakness in the segment. Now wherever news is coming in, it is specifically showing excessive movement there. This has generally been a shunned space. In fact, even though we have watched that in the banking sector, the divergence has been between public sector banks and private sector banks, the entire performance was skewed in favour of public sector banks.

All these skews have been there. Private banks have not done well. They may be up today, but in general, on a three-month, six-month basis they have not really performed and therefore the weakest performance. The performers actually remain the weakest performers and that is not what you really chase to buy. What you try to buy into when the dip happens is what is going to hold out better than the others in the fall and that is something we will not know today. We will know when we get there so that would be the appropriate time to actually have that discussion.