Bears Pause; Mid & smallcaps claw back lost ground

Agencies

Fear Gauge Drops 5.7%
But for the weakness in frontline banks and financials, the recovery would have been stronger.

"The run-up today is more of a relief rally, especially in the smallcap and midcap space after yesterday's sharp fall," said Apurva Sheth, head of research, Samco Securities. "Since the Nifty did not fall as sharply as the Smallcap and Microcap indices, its recovery was slower during the day compared to the others."

Nifty Midcap 150 gained 2.13%, Nifty Smallcap 250 rose 3.11% and the Microcap 250 index jumped 4.04% on Thursday. The three indices on Wednesday had plunged roughly 4-6%, while the Sensex and Nifty dropped around 1.5%.

The Nifty on Thursday took support at 21,900 - considered a crucial level- while the Volatility Index-the market's fear gauge - dropped 5.7% to 13.62, suggesting traders' perception of near-term risks in equities have receded.

Analysts, however, are advising caution.

"The markets are still not out of the woods, so staying alert would help," said Aamar Deo Singh, sr vice president, research, Angel One. "Since it appears to be a technical bounceback from the oversold region for most of the midcap and smallcap stocks, it's best that investors keep a watch on the recent lows."

A break below the support levels could trigger fresh selling but the fall in VIX below the 15-16 levels is a positive development, he said.

'Nothing Unusual'
Some analysts, such as Dharmesh Shah, described the recent plunge as a 'bull market correction.'

"Historical data from 2005 shows that there is normally a correction of 15-17% in and 12% in midcap stocks during a structured bull run," said Shah, Head of Technical research, ICICI Securities. "Midcap and smallcap stocks may see some time-wise consolidation for the next couple of months and see the next leg of rally after May."

Foreign portfolio investors net sold shares worth Rs 1,356.29 crore. Domestic institutions were buyers to the tune of Rs 139.47 crore Thursday.

Analysts said even if the selloff in midcap and smallcap stocks subside, upmoves from current levels will likely be selective.

"The worst may not be over yet for smallcap and midcap stocks and we may see some relief only for good quality shares in the space. Easy money in the segment may not be coming back anytime soon," said Sheth.

Once the market stabilises, largecaps could be outperformers, pushing the Sensex and Nifty to new highs.

"The Nifty is only a stone's throw away from its new highs and may see an immediate resistance at 22,500 levels, with crucial support at 22,000. It can go to 23,000 in a few weeks," she said.

ICICI Securities' Shah said the Nifty has immediate support at 21,800-21,900 levels and could even touch 22,500 in a couple of weeks.

Elsewhere in Asia, China declined 0.18%, Hong Kong fell 0.71%, while South Korea gained 0.94% and Taiwan rose 0.15%.

The pan-Europe index Stoxx 600 ended down 0.18%.