Why is now the time for a new rebound in mid- and small-cap stocks?

Despite the consolidation phase in the Indian market, Nifty Smallcap 100 and Nifty Midcap 100 have remained resilient. After significant gains of around 27% and 25% respectively from November 2023 to January 2024, the index took a breather over the past two months. However, April may mark the beginning of a new rebound for these indices.

But why am I saying that?

Since 2010, Nifty Smallcap 100 and Nifty Midcap 100 have been strong during the month of April. This trend is characterized by a continuous rise in these indices, with April being a particularly favorable time for investors focusing on small and mid-cap stocks.

For example, Nifty Smallcap 100 has recorded positive gains in 11 out of 14 years. These records tie April with December for the most positive movements. Similarly, the Nifty Midcap 100 has had a strong streak, posting gains 11 times, lagging behind October in terms of frequency.

What makes April even more noteworthy is not just the frequency of positive moves, but also the size of the returns. In terms of average returns, April appears to be the most profitable month for both indices. The Nifty Smallcap 100 has posted an impressive average return of 4.44%, while the Nifty Midcap 100 has performed by a significant margin every other month, with a gain of 3.27%. Despite all the talk and concerns about the rally in small and mid-cap stocks over the past two years, it’s interesting to look at their valuations and see that this trend has been largely driven by earnings growth. As the market anticipates upcoming quarterly results, an unexpected surprise in the form of better-than-expected revenue growth could spark a rally. However, it is important to note that while past trends can provide valuable insight, they are no guarantee of future performance. Therefore, investors should be cautious and avoid investing in companies with low quality indicators such as balance sheet strength, cash flow robustness or management credibility. Given the high valuations of benchmark indices, the expected decline in liquidity due to the potential exclusion of foreign institutional investors (FIIs), and increased regulatory scrutiny, investing in stocks without a clear return backing can be akin to skating on thin ice.

Technical outlook:

Last week, the Nifty50 index closed at 22,327 with a notable gain of 1.04%. The index rose above the previous strong resistance level of 22,220 and rose slightly on strong momentum. The rally was supported by all sectors, with only Nifty IT ending the week down 3.1%. Notably, even the mid-cap index saw a strong recovery, with renewed strength in the broader index.

This rally has increased confidence in the domestic market due to the influence of the US market. A decline in India’s VIX, a measure of market volatility, strengthened strength and led to a positive market outlook.

Technically, Nifty50 maintains its position above Simple Moving Average (SMA) 20 and 50 with Relative Strength Index (RSI) at around 57 level. Support levels are now higher at 22,000 and then 22,100, with the next resistance around the 22,750 level.