Sensex crashes over 800 points, smallcaps worst hit. 5 factors brought the bears out

The sell-off in Nifty was led by a 7% decline in Mahindra & Mahindra (M&M) where investors see price cuts in XUV700 as a sign of weakening demand in the car industry. Other top blue-chip losers include , , , and .

All sectors were trading in the red with auto, media, PSU banks, real estate, and oil and gas being the worst hit.

Here are the key factors behind today's fall in Sensex & Nifty:

1) Profit-booking

Following a 12% return year-to-date in Nifty and even higher gains in small and midcap stocks, investors have been looking for opportunities to take some profits off the table. Analysts point out that bulls have been showing signs of fatigue even as all dips eventually get bought into.

After hitting new record highs every other day, bulls are looking for fresh triggers to take the market higher.

2) Valuations

Whether you agree with the theory that Sensex is overvalued at 80,000 or not, many individual stocks have been trading at elevated valuations as retail, domestic mutual funds, and FIIs have been on a buying spree in the post-election phase.

Many market veterans have been warning of froth, if not bubble, building up in large pockets of the Street.

"The disconnect between narratives and numbers can be best appreciated by overlaying the massive increase in the market caps of certain stocks relative to the best-case profit pools of the narratives," says Sanjeev Prasad of Kotak Institutional Equities.

The brokerage finds the valuations of PSU stocks to be quite bizarre when compared with their fundamentals.

3) Earnings expectation

Investors are also finetuning their portfolios in sync with the expectations from the June quarter earnings where the growth momentum is likely to slow down as most of the margin expansion story has already played out in the preceding quarters.

"Earning growth momentum is slowing with revenue growth of only 8% YoY and margin expansion driven by falling commodity captured in base year restrict PAT growth to early teens," Equirus Securities said.

Kotak Institutional Equities expects the net income of the Nifty50 index in Q1 to be flat YoY and decline 10.7% QoQ.

4) Overbought market

On technical charts, Nifty has been giving lethargic formations like small-bodied candles and testing the patience of both sides of the trend. Sameet Chavan of Angel One says the market appears overbought by various measures and has advised clients against aggressive long positions.

Besides, around 86% of NSE500 stocks have been trading above the 200-DMA level, which also indicates overbought conditions.

5) Fed factor

Investors have also taken note of Federal Reserve Chairman Jerome Powell's overnight statement that a rate cut is not appropriate until there is greater confidence that inflation is moving sustainably toward 2%.

Fed has also expressed concern that holding interest rates too high for too long could jeopardize economic growth. The inflation data in the US expected on Thursday will determine Fed action in September.