We had a good day. This day was awaited for quite some time. It may not be the end of the misery, perhaps, but certainly a good relief day to celebrate some current that has come back in the market today.

So bulls are back with a bang. Can we sort of, you know, start to build scenarios for the upside, or is there a twist? Let’s analyze with some data

Where is the market headed?

Market Overview

The markets, as we have been expecting since the last week or so, will retest the downward trending moving average that we have here. Somewhere near 23,000 was the estimate, and we are now within a couple of hundred points from there. This breakdown, the point that we broke down from in February, the bottom of January lows, is crucial. We could consolidate here, but a breakout above this level probably is going to give some hopes to the bulls. Right now, we are making sort of lower lows and lower highs on a very small daily basis. A daily pivot has been broken up somewhat like what happened here, which of course did not carry, but nevertheless, no complaints for this particular move.

Nifty Next 50

Nifty Jr is sort of the first index to come above the 40 DMA, up 2.63%. This has also come out almost 4,500 points since the bottom. So, a very quick recovery is happening on some of these indices.

Nifty Mid and Small Cap

Mid caps also up 2%, and small caps also up 2.66%. So everywhere that you see, you have a good gain.

Nifty Bank Overview

Bank Nifty had quite a remarkable performance, I would say. We have now recovered back to literally the first week of January where we were, and that is a 2% gain on the Nifty Bank.

GOLD

Gold is up another 0.6%. We are nearing 88,760, so 89,000 practically, which was breached on the high of the day. So, gold is not stopping right now.

Nifty Heatmap

Heat maps were completely green.

I will not take the names, but I’ll just point out that Bharti Airtel, despite this market, and Bajaj Finserv along with Tech Mahindra did not participate in the rally. The rest of everything else was a relief rally. Some stocks were really doing well, like ICICI Bank, Mahindra and Mahindra, L&T. The Nifty Next 50 space is even greener. You can see Zomato rushing up 7%, HAL 4%, VBL nearly 5%. Some of the big gains also came from the capital goods segment. So, ABB, Siemens, BHEL, Mother Son Havel, Tata Power, GSW Energy across the board made nice moves.

Sectoral Overview

Sectoral trends were all green, with capital markets coming back very handsomely. Up 4.8% for the week, everything was up. So, I’ll not go through the list, but nothing was down today. IT stocks remain the weakest link for the week. Real estate and media were also slightly in the green. Everything else was in the green, and these three were in the red. So, there is a lot of thawing that is happening suddenly, and one needs to see whether this is going to carry.

Sectors of the Day

Nifty Capital Markets Index

Capital markets also made a slight comeback, up 3.68% here. You can see several capital market stocks doing very, very well, with 361VAM leading that part.

Story of the Day : Don’t rely on past glory. It can kill you.

Now let’s look at this rally, and we’ll focus on small caps because that has been the major pain point. Is there a twist, or is this like, you know, the beginning of something, or should we be reading too much into that? So, let’s look at, let’s say, the small-cap 100 index. We are somewhere near where we were at the beginning of 2024. So about a year’s gain has been lost, but there is hardly any net loss per se from last year. There is good support here. Small caps have also rallied 6% since the very recent bottom. And the question is whether this can be termed as the start of a proper recovery, or are we just sort of, you know, doing what we have been doing?

Firstly, we need to break this trend of lower highs and lower lows. We are currently trying to make a higher high. If we do go there, on some indices, we have gone there, but on the small caps, we are yet to do that. So, immediate resistance will come here. Once we do go beyond here, then we will look at whether we are making higher lows and going higher. So, there is some chance other sectors are leading it, but small caps have not yet shown that kind of promise.

So, how is this going to play in your head? For instance, somebody has, let’s say, sold here. Now, he or she is thinking whether they should buy now, whether they should wait now, how to take those decisions. So, whenever you find that you have no plan of action to the market, all this confusion will be there in your mind. On each drop, people will get out of the market, and on each rise, people will try to get into the market, and it can get cut both ways on that.

If we see the last, let’s say, two years, you can see from April 23rd till September 24th, we had a huge run, like 127% on the small-cap index. So, once we had that run, everybody started to take that for granted, thinking that this journey can continue until infinity. But within five months, we’ve now had, you know, a drop of, let’s say, 22%, and we really started to question small caps, the markets, whether market people should even be there in the market or not. I mean, just look at the context of where you’ve come from and where we are now. After rising 127%, a drop of 22% is, for me, very normal. I mean, why would anybody be really worried about this?

So, this question of whether this is normal or not, to my mind, is not even a question. It’s certainly a very, very normal sort of scenario. But a different perspective can be built where we can see the year-wise returns versus intraday drawdowns over the last 20 years to see the impact. For each year now, we will look at what are the net returns of that year and what is the maximum drawdown within that year, even if it is intra-year.

This is the data of the last two decades. We’ve had some phenomenal years where we made 102% return, 52% return in 2014, 54% in 2017, 57% in 2021, and 54% in 2023. So, many, many years where a 40 to 50% gain was made within one year. Of course, each of those years also came hand in hand with big drawdowns. If you look at all 50%+ years, that year or the year next, you had a nice drawdown. For example, in 2005, we had a 59% return. The maximum drawdown that year was 15%, but the next year was 34%. Then you had a great year in 2007, but the next year, we had a 76% drawdown.

Then we had a 102% return here. The next two years, we had a 23% and a 19% drawdown. And then a third year was 35% down. In 2014, we had a 52% return, and for the next three years, there was hardly any return, but a lot of drawdown in each year. Then you had a 54% return in 2017, followed by two down years, or rather three down years, three drawdowns from there onwards: 40%, 23%, and 47%. Before you had another great year with 57% total returns. Then the year after that, we had a 33% drop.

Then, we had a 54% up year again in 2023. You had mild drawdowns for these two years, and then now we are having a 23% drawdown. So, if you were to see this entire landscape of the last 20 years, nothing has gone wrong. I mean, we had an average return of 20.6%, and the average intra-year drawdown has been 25%, and we are currently at 22-23%, so we are not even at the average. We’ve had years of 47%, 33%, 40%, 35%, 35%, and 76% drawdowns. So, we’ve had much worse years than what we are seeing, at least right now. Maybe we will go there; I don’t know. But as of now, to say that the market has, you know, done some great injustice to investors, I don’t see that happening.

Yes, we’ve lost ground from where we were at the beginning of the year or mid-year, but every year cannot be a 50% year. And despite every year not being like that, the long-term average is 20.6%, which is a phenomenal return. If one were to be able to get that in the long term, anything above 15% is a phenomenal return. But if you’re wanting to get superior returns from small caps, then the extreme drawdowns—40, 50, 60, 70%—have to be absorbed in your portfolio and in your psychology. You need to acknowledge that you are taking on higher risks because you want higher returns and hence must bear with this higher volatility. I can’t wish it away.

The only way you can wish it away in your overall portfolio, probably, is to have asset allocation. You know, you build a portfolio where you are allocating to small caps, but you are also allocating to other assets that are uncorrelated to small caps, negatively correlated—maybe some bonds, maybe some gold, maybe some real estate, maybe some other parts of the market that are not so correlated with small-cap returns. So, that’s how you create an overall portfolio with a slightly better risk-return profile.

In my view, this is absolutely normal territory, not unusual at all. We’ve had 50%+ returns in lumpier manners. I have no doubt that there will come a year very soon where we will have 50%+ returns again. Every two to four years, we are seeing strong returns, and every phase of those high-growth years is also followed by sharp intra-year down years. Those high-momentum phases cool off before the next big move keeps happening.

So, 20% intra-year falls have been followed by good phases in the next couple of years. We’ve had this fall; the fluff is gone, the over-ownership is gone, and the blind following of greedy influencers is gone. We are now in a more, I would say, mature phase, where only mature money is in the market. Historically, such corrections are good and make a case for staying invested. Of course, the runway of the Indian economy is the sort of underlying theme that we all depend upon, and we will continue to have growth for the next many decades.

Volatility isn’t the risk; it is the toll that you pay on the road to long-term wealth. So, embrace the volatility, try to reduce it if you are not able to handle it by the methods I just mentioned. For those daredevils who say volatility is fine, whatever it is, then you should allocate completely to the small-cap space. Have strategies where you will be able to go from the current winners to the next set of winners so that you’re not stuck with the prior-period losers. That is one thing that you really need to do. And for that, there are several vehicles available.

WeekendInvesting launches – PortfolioMomentum Report