It’s been a slightly better day for the market today, but we’re still seeing some interesting trends unfolding. Banking stocks are still not participating in the bounce, but the rest of the market, especially IT stocks, are showing signs of improvement. Mid-rung IT stocks like CoForge, Persistent, and others have done particularly well, while defense stocks also saw some positive movement.

The market is attempting a bounce, and we’re entering the final stretch before the budget announcement, which is only about four to six sessions away. There are rumors circulating that there’s a high probability of some relaxation in tax slabs, which could give more money into the hands of the middle class. Additionally, there’s some talk that there won’t be any changes to capital gains tax. While we should be cautious about rumors, it’s worth noting that there’s no smoke without fire. Last year, the Finance Minister did mention making a structural change to club all short-term capital gains at 20% and long-term capital gains at 12.5%. I’m inclined to believe that she won’t tinker with these rates this time, but if she does, it will likely lead to a loss of confidence going forward.

On the consumption side, we’re starting to see some upward movement or signs of a bottoming out. However, the results from Hindustan Unilever and HDFC Bank have not been particularly exciting. We’re in a kind of “quicksand” territory at the moment, where things feel a bit uncertain. This phase could last a little longer before a base is formed, and we start moving up again. So, while there might be some bounce, I don’t expect a sharp recovery or a return to all-time highs anytime soon.

Where is the market headed?

Market Overview

The market spent the second day moving sideways, with a small gain of 0.22%. After the significant drop we saw a couple of days ago, we could see a few more days of such sideways movement, but we’re also at risk of further declines. Only if we manage to move above the high of the recent drop would we see some increased confidence that the market is attempting a recovery. For now, it feels more like a reaction to the previous downturn.

Nifty Next 50

Looking at the broader indices, the Nifty Junior was up 1.01% today, making up for the losses seen yesterday. The Nifty has recovered from where it was two days ago, while the Nifty Junior is exactly where it was at that point.

Nifty Mid and Small Cap

Mid-caps have been looking more robust, with a 1.78% rise today, and they seem to be moving up from a double bottom. However, we’re still not out of the woods yet, and I’d like to see at least a close above 2450 before becoming more optimistic. Small caps also saw a slight rise of 0.81%, but they’re still in danger territory and could slip further in the next day or two.

Nifty Bank Overview

As for banking stocks, as I mentioned earlier, they are not moving up. The Bank Nifty was down 0.28%. Despite a slight uptick in HDFC Bank’s stock post-results, the broader banking index is still struggling. State Bank of India, Kotak Bank, and Axis Bank were all down, contributing to the weak performance of the banking sector overall.

Advanced Declined Ratio Trends

Momentum trends are reasonably leaning toward the green today, with 340 advances to 160 declines.

Nifty Heatmap

The heat map is very mixed, with cement, autos, FMCG, and pharma stocks moving up. On the other hand, energy stocks like Reliance and BPCL moved down, although Coal India was up. The banking sector is still struggling, with HDFC Bank down, but recovering towards the end of the day. State Bank of India was down by 1%, Kotak Bank and Axis Bank were also down, showing that the banking space is still lagging.

In the Nifty Next 50 space, there were more green stocks. Consumption stocks like Pidilite and pharma stocks like Torrent Pharma and Zydus moved up. Zomato and Indigo were also up, as well as Ambuja Cements and United Spirits. However, Jio Finance was hammered down, and other stocks remained flat.

Sectoral Overview

The sectoral heat map today was quite mixed. Cement, autos, some FMCG, and pharma stocks moved up, while energy stocks like Reliance and BPCL, along with coal stocks, saw some declines. In the banking sector, HDFC Bank saw a recovery after a deeper drop, but others like State Bank of India and Kotak Bank remained in the red.

The IT sector was a standout performer, up 1.8% for the day, and it has now moved into the green for the week. Pharma also rose by 1.4%, making it the leading sector for the week. Autos were up 1.1%, and real estate is attempting a recovery after a rough month, though still down significantly by 18.8%. Overall, commodities and consumption stocks saw a 1% rise.

Banking, on the other hand, continues to lag. The private banking index was down 0.4%, and both the Bank Nifty and PSU Banks are showing weakness.

Sectors of the Day

Nifty IT Index

Story of the Day : Small Cap and Large Cap

Now, let’s talk about a common mistake many investors make when deciding which segment of the market to focus on—small caps or large caps. Over the last few months, we’ve seen the Nifty down by 5%, while the small cap index has fallen by 11.5%. The narrative that small caps will crash and it’s time to move money into large caps is gaining traction again. But is this really the right approach?

History has shown that small caps tend to outperform large caps during bull markets and underperform during corrections. For instance, in the 2003-2008 rally, small caps went up 2000%, compared to Nifty’s 1442%. After the 2009 bottom, small caps gained 550%, while Nifty gained 290%. During the COVID recovery, small caps rose by 40%, while Nifty rose 125%.

On the flip side, during corrections, small caps tend to fall much harder. From the 2008 top, small caps saw a 77% correction, while Nifty dropped 59%. During the 2010-2013 correction, small caps fell 45%, compared to Nifty’s 12%. Similarly, during the COVID crash, small caps were down 64%, while Nifty fell 28%. In the most recent 2022 correction, small caps fell 33%, while Nifty dropped 16%.

So, historically, when markets go up, small caps tend to outperform, but when markets go down, small caps underperform large caps. The ratio of large cap to small cap performance tends to swing between 1.2 and 2.2. When this ratio is low, small caps are performing better, and when it’s high, large caps are doing better.

This brings us to the common mistake many investors make: trying to enter large caps when small caps are performing poorly, or vice versa. Based on the current market conditions and historical trends, it seems like now is a better time to focus on large caps rather than small caps. Does that mean you should exit your small-cap positions? Not necessarily. Small caps still have potential, but the expectation is that large caps may outperform them over the next couple of years. For example, while small caps might give you a 15% return, large caps could offer a 20% return.

So, rather than trying to pick one segment over the other, it’s better to look at your portfolio allocation. As we are currently seeing large caps outperform, you could consider shifting more of your portfolio towards large caps. For example, if you had 33% in small caps, you might reduce that to 20% and allocate the additional 13% towards large caps. This is a tactical allocation strategy that can help you manage your risk and take advantage of the current market dynamics.

A healthy mix of small, mid, and large-cap stocks is always a good approach, and tactical adjustments can be made based on the market cycle. For those who prefer a more systematic approach, an annual or biannual rebalancing of your portfolio might also help maintain the right allocation across different asset classes.

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