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Smallcap stocks record-breaking 200% rally is starting to crack

Most equity valuations have already priced in positive factors such as improved business models and the sector’s resilience, creating room for a correction, according to Chaturmohta. (iStock)Premium
Most equity valuations have already priced in positive factors such as improved business models and the sector’s resilience, creating room for a correction, according to Chaturmohta. (iStock)

  • The S&P BSE Small Cap Index has retreated 9% from a record high after hitting the top end of a logarithmic, suggesting that the drop may not be over given the extent of the rally

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Investors still betting on India’s small-cap stocks to rally may need to be more selective as the market slumps. 

The S&P BSE Small Cap Index has retreated 9% from a record high after hitting the top end of a logarithmic, parallel channel originating from the 2013 lows, suggesting that the drop may not be over given the extent of the rally.

“We have seen some declines already kicking in, and going forward, the recovery will be more stock specific," said Ashish Chaturmohta, director of research at Sanctum Wealth. “One needs to be selective." 

Most equity valuations have already priced in positive factors such as improved business models and the sector’s resilience, creating room for a correction, according to Chaturmohta.

The index could test the 25,300 area, where a resistance level turned into support in August as the market rallied almost 21% from the level before peaking. The support area also coincides with the index’s 23.6% Fibonacci retracement of the March 2020 to October 2021 rally, indicating a downside “zone of interest," charts show.

The gauge fell as much as 4.1% on Monday, before closing 1.9% lower, compared with a gain of 0.3% for the benchmark S&P BSE Sensex.

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