It’s been another great day for Indian markets, and many people are watching in disbelief as the markets continue to climb the ‘walls of worry.’ A lot of cash is still on the sidelines, waiting for a correction or dip. Several mutual funds, institutional investors, and High Net Worth Individuals (HNIs) have moved to cash or significantly increased their cash holdings. In fact, a well-known mutual fund has increased its cash exposure to nearly 20%.
Who can blame them? Even Warren Buffett is sitting on a lot of cash. The world seems flush with funds, and with the rate-cutting cycle beginning, liquidity is unlikely to dry up. As interest rates drop, more liquidity will enter the system, and credit will become easier to access. So, waiting for a market correction to deploy funds may not be the best strategy.
Let’s dive into today’s analysis.
Market Overview
While no one can accurately predict where the market is headed, the current trend is certainly very positive. In just two weeks, we’ve seen the Nifty 50 rise from 24,700 to 25,900, with a 0.57% gain today alone. This has caught many people off guard, especially those waiting for a correction.
Nifty Next 50
The Nifty Junior index also saw a 1.6% gain today after lagging for a few sessions, marking a clear breakout.
Nifty Mid and Small Cap
The Nifty Midcap 150 and Smallcap indices both hit new all-time highs, with gains of 0.75% and 0.86%, respectively. When all sectors of the market are hitting all-time highs, it’s not a sign of weakness.
Now, it’s true that markets hitting all-time highs could be seen as a warning, but most of the time, markets that make new highs tend to keep rising. It’s like crossing the road—yes, there’s always a risk, but you don’t stop crossing the road because of it.
Nifty Bank Overview
The Bank Nifty has surged from 50,500 to 54,105 in under two weeks, and it’s finally catching up to the rest of the market. As Indian interest rates are expected to come down, banks’ bond portfolios and credit growth are likely to improve. That’s why we’re seeing such strong moves in bank stocks.
Advanced Declined Ratio Trends
In terms of overall market breadth, advances significantly outpaced declines today, with 331 stocks advancing and only 166 declining in the top 500 stocks. There was a huge inflow of 14,000 crores from Foreign Institutional Investors (FIIs) on the 20th of September, while Domestic Institutional Investors (DIIs) sold 4,400 crores.
Nifty Heatmap
Looking at the heatmap, most stocks were in the green, with SBI leading PSU banks, up 1.4%. Reliance, ONGC, Coal India, Bajaj Auto, and Mahindra also saw gains. The only notable laggard was ICICI Bank, but it had performed well in the previous session, so there’s not much concern there.
In the Nifty Next 50, PSU stocks like IOC, BHEL, HAL, PFC, and Bank of Baroda were the big winners. Zomato, Trent, and major industrial names like ABB, Havells, and Bosch also performed well. PSU banks had a particularly strong session, with the PSU Bank Index up 3.4%.
Sectoral Overview
The real estate sector is up 10% over the past month, leading the rally, though it’s been one of the weaker performers over a three-month period.
Sectors of the Day
Nifty PSU Banks Index
Public sector enterprise stocks and auto stocks have also rallied, buoyed by the expectation of lower interest rates.
Story of the Day : Should we wait for a correction in small caps?
Over the past 18 months, small and mid-cap stocks have significantly outperformed large caps, with gains of 110% to 120%, compared to 47% for the Sensex. However, in the last two weeks, large caps have started taking the lead, with a 5% rise compared to 3-4% for mid and small caps.
There are signs of divergence, with the RSI on small-cap indices showing some weakness. Mid and small caps have underperformed the broader market in recent weeks, and 37% of small caps are now more than 20% below their 52-week highs, compared to only 24% in the top 500 stocks.
So, should we exit small caps? Some investors are concerned about the high valuations in the small-cap space and are sitting on cash. But when we look at the price-to-earnings (PE) ratio, we’ve seen much higher valuations before. Currently, the PE is around 36, but during the pre-COVID peak, it was at 47.
The big question is whether small caps are overvalued. The small cap-to-Sensex ratio is at its highest point in 20 years, indicating that small caps have significantly outperformed. However, this doesn’t necessarily mean small caps will stop rising—it could just mean large caps will rise more.
The key takeaway here is that timing the market is extremely difficult. Rather than trying to guess when a correction might happen, it’s better to have a strategy with predefined rules and exits. If small caps do start to fall, a well-designed strategy will automatically rotate you into defensive stocks or cash. You could also consider reallocating some of your small-cap exposure into large caps.
