Why it’s time for a fresh rally in midcaps and smallcaps

Since 2010, the Nifty Smallcap 100 and the Nifty Midcap 100 have embodied a bullish run in the month of April. This trend has been characterized by consistent upward movements in these indices, marking April as a particularly favourable period for investors eyeing small and .

The Nifty Smallcap 100, for instance, has recorded positive gains in 11 out of the 14 years. Such a track record makes April tied with December for the highest number of positive movements. Similarly, the Nifty Midcap 100 has shown a bullish streak, gaining ground on 11 occasions, trailing only behind October in terms of frequency.

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What makes April even more noteworthy is not just the frequency of positive movements, but also the magnitude of the returns. In terms of average returns, April emerges as the most lucrative month for both of these indices. While the Nifty Smallcap 100 registers an impressive average return of 4.44%, the Nifty Midcap 100 yields a 3.27% gain, outperforming every other month by a considerable margin.

Despite the talk about the smallcap and midcap rally in the last 2 years and concerns about their valuations, it’s intriguing to observe that this trend has been significantly driven by earnings growth. As the market anticipates the upcoming quarterly results, any unexpected surprises in the form of better-than-expected earnings growth could fuel the rally.

However, it's important to note that while historical trends can provide valuable insights, they do not guarantee future performance. Thus, investors should exercise caution and avoid investing in companies with lower-quality metrics such as balance sheet strength, cash flow robustness, or management credibility. Given the high valuations of benchmark indices, expected lower liquidity due to potential sidelining by Foreign Institutional Investors (FIIs), and increased regulatory scrutiny, investing in stocks without solid earnings backing could be similar to skating on thin ice.

Technical Outlook:

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In the past week, the Nifty50 showed a notable upswing of 1.04%, closing at 22,327. The index surpassed its previous strong resistance of 22,220 and inched higher with strong momentum. The rally was supported by all sectors, with only Nifty IT ending lower by 3.1% for the week. Notably, even the midcap index exhibited a strong recovery with renewed strength in the broader Indices.

This rally was largely fueled by the US market which boosted the confidence in the domestic market. The decline in India VIX, a measure of market volatility, enhanced the bulls resulting in a positive market outlook.

Technically, the Nifty50 maintains its position above the 20 and 50 Simple Moving Averages (SMA) with the Relative Strength Index (RSI) standing around 57 levels. The support level has now shifted higher towards 22,000 followed by 22,100 while the next resistance stands around 22,750 levels.