Divergence leads to Convergence’
Till October 2018, the broader market indices MIDCAP 100 and SMALLCAP 100 were moving in tangent with the benchmark indices. Since then, NIFTY surged around 20% due to substantial buying in heavyweights while the small and midcap stocks maintained their southward journey due to lack of buying interest. This has created a divergence between all the three indices as displayed above.
Currently, the NIFTY MIDCAP 100 index is almost 18% away from its all-time high whereas the NIFTY SMALLCAP 100 index is away by 35%. Now we believe that generally a ‘Divergence leads to Convergence’ and going by that theory there could be three possible scenarios from here on.
- Best Case Scenario: Let’s assume that post budget, NIFTY 50 rallies further. In this case, the broader markets will have more to catch-up and that could trigger fresh upside in the MID and SMALL cap stocks.
- Stagnant Scenario: In case of some consolidation in NIFTY 50, there is again a possibility that the broader markets outperform due to attractive pricing.
- Worst Case Scenario : In a worst case scenario, if NIFTY 50 undergoes correction and try to catch- up with the broader markets then even in this condition the downside could be limited in MIDCAP and SMALLCAP stocks due to oversold conditions. Post which ensuing rally will likely leadership coming from Mid and Small cap basket.
Thus we expect that the next leg of rally in the markets could be finally for MIDCAP and SMALLCAP stocks.