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Mid Small Cap Shift – Is it worth…??

Markets have been nowhere during the past couple of months as seen a wide range of sideways action. This seems to be the case for Investors entering into markets as they fail to see opportunities. Nevertheless, Markets are always full of opportunities if seen in the right way. During the past couple of months, there has been a shift in focus towards a specific set of stocks or rather towards Mid and Small-cap space. Let’s discuss the evidence of such a scenario and find real opportunities in place.


Mid Cap

Midcap space consists of value stocks except some that have been into the news in recent times and followed by the market leaders sector-specific decline was witnessed. The parallel channel on the monthly charts is now witnessing a breakout with steady support from the Ichimoku Cloud ceiling. The history indicates a well-supported rally from the cloud areas with RSI supports around 40 levels during the previous iterations. Now, dropping on to the daily timeframe, a nice rounding bottom with a fresh breakout validates the signal emerging from the larger timeframe with a range shift in RSI. Thus, the rise seems to be promising.


Small Cap TWR

While most of us have been caught up in the ranging action of the large caps and Nifty/Bank Nifty, it is the small-cap index that has been making a great run! Look at the chart shown with the TWR pivots on it. See the superb climb of the daily TWR pivots- they have just been moving up every single day! The weekly and monthly TWR pivots too are shown in the chart and currently, prices are trading above all 3 of them! The monthly pivot low is around 5900 and unless that is lost decisively, we can continue to be bullish for sure. This action is surprising considering that market sentiment has continued to be passive but smart money seems to have got quietly into action!!!

Small Cap

Furthermore, the indications of the chart are specific of the recovery in recent times with some great action to be witnessed in the future. Again the Ichimoku cloud on a larger timeframe shows the end of the rally with additional supports available from the Fibonacci confluence. All are marked on the charts. Daily timeframe chows a nice symmetrical triangle breakout just happened and such cases with move forward backed by strong momentum readings indicate on the rally to sustain.


Here’s a ratio chart of Nifty Smallcap100 to Nifty.

Small Cap Comparative

In 2019, the Nifty had slipped by 12% before the corporate tax cut in September led to market recovery while the Nifty small-cap had corrected by ~25% during the same period. Over the past 1 year, the Nifty has grown by 14% while small-cap has declined by over 6%. Whenever the price-to-earnings (P/E) valuation of small-caps has gone down to 40-45 percent of the Nifty, there tends to be a bottoming out. Small caps are already showing signs of a strong recovery since the market is expecting the economy to start responding to the government’s efforts to revive growth.

In the past 1 month, Small caps have gone up by ~4.5% while the Nifty has gone up by ~2%. On the ratio chart, we can see how the small-cap has recovered much faster than the nifty as the small-cap/ nifty ratio is at 0.49x. This rally is expected to continue but it will be contingent on a rebound in India’s economic growth.

Action in small and mid-cap space is picked up and continued into the New Year.  The Small and Midcap indices have reacted back to the main support bands on moving averages and now near term swing highs are being exceeded. This changes the swing status and that can lead to better moves ahead if good news flow emerges. Quarterly results can present us with that trigger, perhaps.

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