Market Meltdown: A Sea of Red!

Hello??♂?!

We are here with the 24th edition of ‘Sharpe Insights’. As always we are going to keep this around 4-5 minutes! Don’t forget to answer the question at the end to win a 1-month subscription to sharpely Pro. Let’s dive in!

Last week, we saw the fall we all braced for in the past three weeks. The Nifty fell on Monday and took a brief pause on Tuesday. Small and Midcap stocks continued to correct in both these days. And we saw a meltdown on Wednesday. There was a market-wide fall as only 20 stocks from the Nifty 500 closed in green on Wednesday.

We have warned you multiple times that the momentum in the market is disappearing and we are bound for some correction. Now many are wondering if is this the end of the crazy rally in the small and midcap stocks. Well, we have tried to answer that question with our data-driven tools. But before jumping to that, let’s look at some important data points.

Global Macro Factors??

Global macro factors were mostly negative last week. Crude oil spiked by 3.44% during the week and is now trading above the $84 mark. Gold fell marginally by 0.20% and is trading close to the $2173 mark. Last week we saw a strong breakout in gold. And it is not giving up the gains. So, it is looking strong now.

The US 10-year Treasury Yield also spiked by 0.3% and it is now at 4.308%. It was cooling off in the past few weeks. The news of escalation in the Russia-Ukraine war and rising geopolitical tension can be catalysts of this spike. A rising yield is a negative signal for the market. So, this is a bad news.

The dollar index increased by 0.59% and USD INR was flat. The USD INR is still firmly trading below the 83 level for the fifth week in a row. The S&P 500 gained marginally and ended with a 0.52% gain during the week.

On the domestic front, India's forex reserves jumped by $10.47 bn to an over two-year high of $636.1 bn as of the week ending on March 8.

Market Performance??

Last week was not the week for the faint-hearted. The market plunged during the week. We were expecting some consolidation or fall in the week, but nobody expected the intensity of the fall. All major benchmark indices ended in red. Advance decline numbers are also extremely bad showcasing that this was a market-wide fall. Large companies saw relatively lower selling compared to smaller ones.

We can see the same looking at the 1W performance from top to bottom in the below image (As we go down, the length of the red bar is increasing).

Nifty 50 ended the week with a down move of 2.09%. And it was the strongest performance among other benchmarks. Nifty 100 and Nifty 500 fell by 2.35% and 2.98% respectively.

There was carnage in the mid and small-cap stocks. After the SEBI chief’s statement on froth building in the mid and small-cap space, we saw hard selling in this space. During the week, Nifty Midcap 100 went down by 4.66% and Nifty Smallcap 100 plummeted by a whopping 5.49%. Stocks trading with overstretched valuations saw a steep fall during the week. We warned you about the extreme valuation with an example of Tata Investments. Last week, it was the top loser among Nifty 500 stocks with a weekly fall of 22.62%.

Sector Analysis??

On the sectoral front, there was a sea of red. Almost all sectors ended in red (except IT). Some sectors that looked relatively stronger were IT, FMCG and MNC as many large-cap companies belong to these sectors. Nifty IT ended with a gain of 1.08% while Nifty FMCG and Nifty MNC fell marginally by -0.46% and -0.31% respectively.

Apart from that, all the sectors fell by more than 1%. And the fall was severe in some sectors. Five sectoral indices fell by more than 6% during the week (yeah! Read that again).

Nifty Realty was the top loser with a weekly fall of 9.42%. Sobha was the top loser among realty stocks as it fell by 17.32% in the week. This was followed by Nifty PSE and Nifty Media as they fell 9.13% and 8.34% during the week respectively. Many PSEs were running ahead of their time and they saw a sharp correction. Nifty PSU bank also fell sharpely with a down move of 7.90%. There was a market-wide panic during the week.

So, now let’s come to the main question.

Is this the end of the bull market and this rally?

This is unlikely to be the end of a long-term secular bull market but markets do not move in a straight line and we could see some pain in the short term. Here is an old tweet from an ace investor.

We feel that the fall we saw during the week was mainly due to the profit booking. Mid and small-cap stocks were trading at exuberant valuations that were not sustainable and last week the sanity came back in.

So, is this the end of the crazy rally in mid and small-cap stocks? Well, we don’t know if this is the end or not. But for the next few weeks, we may not see the wild moves that we saw in the last 12 months.

As we can see, the small-cap index has broken the 10-week EMA for the first time since March 2023 and it has broken it with some force. The midcap index also has a similar chart.

If we talk about market breadth, now 66% of the nifty 500 stocks are trading above the 200-day EMA. In a strong bull run, we generally see a reversal around the 70% mark. So, it will be interesting to see how this moves on from here.

What should you do? If you are a long-term investor, this may be the right time to buy some high-quality small and midcap names with strong business momentum. If valuation becomes comfortable, there are multiple strong names in this space. And they will be the first ones to recover. If you are a short-term or swing trader, look for the setups in the large companies (maybe Mcap> Rs. 15000 Cr) for now.

In conclusion, we are still in an intact bull market and we will see this kind of profit booking move from time to time. As smart investors, we should benefit from the panic. But this correction is an example of the importance of the valuation. Always respect the valuations in investing.

Quiz??

Every week we ask an interesting question. Answer the question and get a chance to win a 1-month subscription to sharpely Pro!

Q) Last week PM Modi laid the foundation stone of how many semiconductor projects in India?

Answer the question by replying to [email protected]

Last week’s answer: JM Financial and IIFL Finance

That’s it, folks. See you next Sunday!