There is trouble brewing under the surface, as more than a quarter of the stocks that are part of the Nifty Smallcap 100 and Nifty Midcap 100 index are now deep in the bear market territory. A stock is said to be technically in the bear market, if it falls more than 20 per cent from its recent high.
In the Nifty Smallcap 100 index, usually used as a benchmark for that segment of the market, 28 stocks have plummeted more than 20 per cent from their 52-week highs in recent sessions. Further, another 56 stocks have nosedived more than 10 per cent from their recent highs and are now in the correction territory, data compiled by ETMarkets.com showed.
In the case of the Nifty Midcap 100 index, the most cited benchmark for the segment, 22 stocks are currently down more than 20 per cent from their 52-week highs while another 39 stocks are in the correction territory, data showed. Data is compiled as of Wednesday’s closing price.
“A lot of this bloodletting is happening because this is a pure leverage issue in the market,” Ajay Srivastava, chief executive officer of Dimensions Corporate Finance, told ETNow.
While the median smallcap and midcap stock is down 16 per cent and 11 per cent from its 52-week highs, the Nifty Smallcap 100 and Nifty Midcap 100 are down merely 6 per cent and 3 per cent from their all-time highs.
The deep cuts in the smallcap and midcap stocks are the first sign of trouble in the paradise for millions of first-time investors, who entered India’s stock market since the start of the Covid-19 pandemic. On an average over 1 million new dematerialised accounts have been opened per month since May, according to Sebi data.
Prior to the sell-off, the Nifty Smallcap 100 and Nifty Midcap 100 indices were perched at record highs having nearly tripled in value since hitting their multi-year lows in March 2020.
The dramatic fall in the midcap and smallcap indices has been largely triggered by the introduction of new surveillance rules by BSE, India’s oldest stock exchange, to maintain market integrity and curb excessive price moves.
The circular issued by BSE on Monday caused investors to liquidate their positions on fear that the new add-on price curbs over and above the daily price limits could see their paper profits get stuck. BSE, however, on Wednesday revised its new surveillance rule providing relief to investors.
Despite the seemingly meaningful correction in the midcap and smallcap stocks, money managers have advised investors to tread with caution, as valuations in the segment still remain elevated compared with historical metrics.
“The run-up in valuation has been sharp in the case of midcaps and smallcaps. One has to be careful and cognizant, especially, when you are finding euphoria building in certain pockets in the market,” said a senior equity fund manager at a large mutual fund house.
The correction in the most outperforming segment of the equity market has not taken most by surprise given that some money managers had been pointing to excesses building up. Market participants, however, are expecting buying to return soon given the hordes of cash sitting on the sidelines.
