The market just doesn’t stop. I mean, we had a huge gap down this morning, and there was virtually no recovery throughout the day. Of course, the developing news is that NASDAQ futures are down 3%, SoftBank is down 15%, and Nvidia is down 10%. $350 billion has been wiped off Nvidia in just the pre-market open. So, big moves are happening in the global tech scene, and we are getting hammered even more than any internal issues we were facing so far. I think it’s extremely unlucky, especially for the timing of this breakdown in US tech stocks and the AI story. Let’s see how far this goes. But it does look like the AI story has been pricked by a Chinese company that seems to be developing similar artificial intelligence tools like ChatGPT at a fraction of the cost. So, if that really becomes the go-to product or technology, then a lot of these highly valued companies will obviously collapse.

And of course, any collapse has a trickle-down effect and sort of an avalanche impact on the rest of the market. So, the Indian market, although it was very weak even as of Friday’s close, has taken a hit today, wiping out a good few percentage points of our market cap as well. Not looking good. I wish I had better news, but right now, it’s a really tricky situation to be in. So, big fall today—Is it time to exit small caps? We’ll discuss this. I’ll show you some historical perspective and some contextual perspective that’s required to assess where we are in the cycle.

Where is the market headed?

Market Overview

We’ve broken down convincingly below this consolidation today. I was hoping that this consolidation would stay intact at least until the budget, but today itself, due to global cues, we’ve broken down. So, 23,000 is gone. We’re at 22,800, and there is really no support right now in immediate vicinity.

Nifty Next 50

We’re down 1.14% on the Nifty, and Nifty Junior is down 2.8%, so a deeper gash here, and the continuation of this down move has started again.

Nifty Mid and Small Cap

Mid-caps are collapsing 2.8% as well, so we’re seeing new lows on mid-caps for the last year or so. Small caps are also falling about 3.6%. The biggest hit has come on small caps, down 3.66%. It has just stopped where there was a gap. I should have shown you a larger chart; there was a gap near the June 4th movement that’s been covered today. But that really doesn’t give much solace to the current situation.

We’re now down from 18,700 to about 15,400—approximately 16-17% down. The chart is not looking pretty on any of them, actually.

Nifty Bank Overview

The Bank Nifty is probably the only index where there’s some hope. It erased 0.63% today and actually tried to come back during the day. The rest of the charts didn’t even try to recover after the morning open. The Bank Nifty seems to be the best, or at least the strongest index out there.

Advanced Declined Ratio Trends

The advance-decline ratio is dismal, 450 declines to 49 advances. So, it was a really, really bad day overall.

Nifty Heatmap

Looking at the heat map, ICC results were good, and that was up. Fortunately, State Bank also managed to stay positive. Hindustan Unilever has stopped dropping, and it’s up by 1%. ITC is flat at 0.3%, L&T is flat, and Maruti Mahindra was flat. What lost big were IT stocks like Infosys, HCL Tech, Wipro, TCS, Tech Mahindra, energy stocks like ONGC and Coal India, Reliance, and HDFC Bank—these continued to fall big, down 1.2% there. You also had some FMCG stocks like Nestle and Tata Consumer dropping, and power stocks like Power Grid were down. Even pharma stocks were dropping today. Some names like Bharti Airtel also gave up some ground. Tata Motors had the biggest auto loss, down 2.8%. The Nifty Next 50 was awash in red, with most stocks down 2 to 5%. DLF, after its fantastic numbers, managed a 1.2% gain, and Torrent Pharma saw a 2.7% gain. But other than that, there were really no major gains today.

Sectoral Overview

All red. Banking was the least affected. FMCG didn’t fare much better, down 0.7% compared to 3%. Real estate, which was in the green at the start of the day, succumbed to a -1.1% drop. Metals, IT, Public Sector Enterprises, Pharma, and Energy stocks—all of these lost more than 2%. The IT sector has now lost its entire weekly gains and even the entire month’s gains, which had started to look somewhat positive. Energy and real estate stocks are now leading as the three-month losers. So, there’s really no green shoots anywhere in the market right now.

Sectors of the Day

Nifty Capital Market Index

The Nifty Capital Market Index fell the most, down 5.7%, with stocks like CDSL and Aditya Birla AMC dropping nearly 10% each. CAMS, Nuama Wealth, BSE, and Nippon Life all dropped more than 5 to 6%. Angel One was also hit. So, sector after sector is getting thrashed, creating a ripple effect, with each sector falling one after the other.

This is probably natural in a very steep declining market, where whatever sector of strength is left will eventually also get broken down. One by one, you’ll see sectors giving in.

Story of the Day : is it time to exit small caps?

You know, whenever the market falls and we see red in our portfolios, we often feel like it’s the end of the road and that maybe we should just quit. That feeling will always come. We’re down approximately 17% from the top on the small-cap 100 index, which is deep, no doubt. But let’s look at some of the past moves for context. For instance, the small-cap 100 index was at 2,600 in August 2013 before the rally started in the last decade. If someone had told you back then that in the next 12 years, the index would hit 16,299 at a CAGR of 17.4%, you would have probably thought that was unbelievable, but also very enticing. And from there, there was a rally, followed by a decline after 2018 to 6,200. Again, if someone had told you we’d hit 16,300 in the next five years, that would have been a CAGR of 15%, which still would have been acceptable.

Then, in the last move, after this decline, we peaked in October 2021, and after a fall to around 7,900, if someone had told you the small-cap index would hit 16,300 in the next two and a half years, you’d have found that unbelievable too. But this is what happened, with a CAGR of 32% in the next two and a half years. Now, we are a bit off that new high, and our expectations are based on that. What we see as “the high” is now already in our pocket, and whatever is going away feels like our loss. This mindset is the reason why most people feel hurt and think they are losing money.

But actually, if a stock goes from 100 to 200, and another goes from 100 to 500 and then comes down to 300, the person holding the latter is in more pain, even though the first person is at 200. The point here is that if we’d grown at a lower CAGR of 15% in the past two and a half years, we’d still be much lower than where we are today, and we’d have been happier with our returns. But because we saw that huge hump of a 32% CAGR, we feel that it’s already in our pocket, and now it’s our loss.

This thought process needs to be realigned. You were going to get that return, but the market took a different path. As long as you are following your strategy and investment style, seasoned investors don’t tend to get bogged down by this. Yes, the losses hurt everyone, but they are not running away from the market because they’ve seen this cycle so many times. I’ve personally seen it countless times over the last 30 years, and there’s no question of running away from the market.

A lot of folks on Twitter and elsewhere are asking if they should quit the market, or wait for it to bottom out. But who can tell when the market has hit bottom? I remember clearly when the COVID fall was happening. Even till 2021, during that entire period, no one believed the rally could last. Even when we crossed the pre-COVID level, there was no belief that it could sustain. Yet, small caps rose fourfold from the bottom during that period. So, who can say whether the market is heading down or up? No one can predict it with certainty.

The allure of small caps is the potential for alpha, but people don’t want to endure the pain of corrections. There cannot be a one-way ride—you need to endure the pain if you want that alpha. The falls in small caps have been much sharper, much lower, much deeper in history, but it’s not clear yet if we’re in one of those situations where the entire market is collapsing and we’re facing global mayhem. If that happens, more pain may follow. The small caps are already showing some signs of a bottom, but it’s too early to say whether that’s a sustainable reversal. The key is to follow your strategy, stick with it, and take a longer view. Don’t exit on every market fall. Many folks tend to do that, but seasoned investors have seen it before. When small caps rise again, no one will even remember this fall, but those who are sitting on cash or have exited will regret their timing.

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