Two more sessions to go before the budget. The market bounced today, which can be described as a relief rally for sure. We don’t know whether this is an intermediate bottom, a long-term bottom, or just a short-term bottom, but nevertheless, it’s a much-needed relief for soothing some broken nerves. Even a 5% rally in many stocks after a 25% drubbing will give you a sense of relief. That’s what has happened today.

However, I think one should not read too much into this, as if betting on it as the new leg up. It may well be, but it may not be. It will take some time before we can really say with any higher probability that the market has started to go up. So, this is just a reactionary dead cat bounce, you could say. Once the structure for the leg up is confirmed, only then will the probability of going higher become more reassuring.

Today, we will talk about some data points that will shock you and probably save you from all this volatility in the future.

Where is the market headed?

Market Overview

Nifty, for the first time since 1st January (or rather, 2nd January), has closed above the previous two-day high. This happened today. It was completely rejected earlier, and it can still happen now, but at least it is the first glimmer of hope that maybe we are going to get a leg like this here. Nobody can say right now whether we will or we won’t, but the probability is higher when a close above the two-day high is achieved.

That is just my observation, my way of looking at charts. For instance, here, the market will get broken down many times, but then most of the persistent rallies that happen above a two-day high usually do a lot of good. So the first filter, you could say, to look at whether the market can go up has been achieved today. However, there are going to be many more filters. We also need to go above this pivot to get more reassured. We need to have this average move up, a structure of higher highs, higher lows, and then a real upward movement. That will probably cement the potential for the up move even more.

It’s been a good day with a 0.9% increase on Nifty.

Nifty Next 50

Nifty Jr. also followed suit with a similar 2% gain, a good move into the gap, though not yet filled.

Nifty Mid and Small Cap

Mid-caps didn’t get above the two-day high but had a good 2.4% pullback. A lot of folks who sold on the drop on Monday and Tuesday probably already feel a little bit of FOMO, wondering why they sold at the bottom. Selling at the bottoms will often create confusion in people’s minds, so always have a strategy to sell. Don’t sell just because you think markets are going to collapse from tomorrow.

Small caps also gained 3.1%, but this is just a very small up move from this bottom so far. It’s nowhere near the major breakout or breakdown point that happened last week, so it’s hard to say much about it. But nevertheless, it’s a good move at this point, two days before the budget. I think the next two days should either go flat or slightly higher. That is my guess, given that there’s always a surprise element in the budget, even if it’s just 2%. Maybe the Finance Minister will have some good dreams and be in a good mood on Saturday.

Nifty Bank Overview

Bank Nifty, which was running yesterday, gained 0.6%. So, it’s very much in the green zone. The last three candles from the open have been closing higher. This is a reasonably decent outcome, but it needs to really break the 50,000 mark to make sure that we are going up.

Advanced Declined Ratio Trends

The advance/decline ratio was 444 advances, with only 55 declines.

Nifty Heatmap

The market heat map was mostly green, with only a few stocks like Maruti, Bharti Airtel, and Asian Paints down.

On the other hand, many banks and finance companies moved up. The RBI’s liquidity push and lower yields suggest that a rate cut may come in the first week of February, which is likely contributing to stocks jumping back up. Nvidia and similar companies, which had been drubbed recently, have started to move back up again. Other auto stocks, cement stocks, steel stocks, and pharma stocks also did well in the Nifty Next 50 space. Zomato was leading the rally at nearly 7%, while TVS Motors was up by 5.5%.

You also had Siemens, ABB, and Bosch moving up, though Bosch was down possibly due to their results being out. Divi’s Lab, Zydus Life, and BHEL clocked a 6.5% gain. PFC, IRFC, and DLF all did well, along with Bajaj Holding and Chola Finance. GSW Energy, however, was down post-results.

Sectoral Overview

In terms of sectoral trends, real estate is picking up very quickly, gaining 2.9% today after nearly a 2.5% rise yesterday. This week, real estate has been the highest gainer. IT stocks were also strong, up by 2.6% today and green for the week. Auto stocks were up 1.5%, also green for the week. Private banks are in the green zone for the week, up by 0.8%, and the Bank Nifty overall is up 0.9% for this week.

So, real estate, which was hit the most, has bounced back the most. FMCG, on the other hand, is not performing at all—it’s just stable, not going up or down for the last 12 months. FMCG is now absolutely flat with 0% returns, and you had some minor gains in banks, consumption stocks, commodity stocks, etc.

Sectors of the Day

Nifty REALTY Index

In the real estate space, you can see the index is trying to pull back up, and there have been some big moves in Brigade, Mahindra, Prestige, Godrej, Raymonds, etc. That’s good news for real estate stocks. I think a small intermediate leg could potentially challenge the 950 level here.

Story of the Day

What is a typical investor’s journey? They hear about other people making money in small caps and enter at the peak of FOMO. Then, when markets go through a fall, like they are doing now, they exit. Maybe they’ve already exited or will do so in the future. This is the typical journey for a new investor—someone tells them names of four or five stocks, and they invest in them or some similar strategy.

This is the story of not just a few people, but the story of most people who come to the market for the first time. They want the alpha in small caps but don’t have the appetite, the right approach, or the right expectations. They don’t know what they’re really investing in or what the volatility is going to be. They hear stories of people putting in 100 rupees and turning it into 500 overnight or putting in 20 rupees and watching the stock go to 70 rupees in a day. But they don’t realize the reality of how investing works.

So, we are doing a data experiment here. Let’s add some gold to your small-cap investing and see the outcome. Hopefully, you’ll be pleasantly surprised by the results. A lot of people ask why I keep doing episodes on gold. We’re not making money from gold, but I just want to make sure that asset allocation becomes part of your thought process, even if you are a new investor. That way, when you reach a level of investing where you can allocate assets, it’ll be ingrained in your mind that asset allocation is key to a long journey in the markets.

Now, let’s look at some data points. We’ll take data from four or five peaks: there was a peak in December 2007 or January 2008, another peak in October 2010, January 2018, and January 2022. We have data until January 2025.

• From the peak of 2007: If you only had the small-cap 100 index, you would have made a CAGR of 6.3% till today. However, you would have suffered a max drawdown of 75%. If you had added 50% gold and 50% small cap 100 to your portfolio, the CAGR would have been 11.1%, and the max drawdown would have been nearly 40%. A much lower drawdown with a much higher CAGR. If you only held gold, the CAGR would have been 12.3%, and the max drawdown would have been 25.3%.
• From October 2010 peak: The CAGR for small caps was 11%, with a max drawdown of 60%. If you added gold, the CAGR would have been 11.9%, and the max drawdown would have been reduced to just 20%. If you only held gold, you would have had a CAGR of 9.7%, with a max drawdown of 25.3%.
• From January 2018 peak: The small-cap CAGR was 8.7%, which is poor. If you added gold, the CAGR would have been 13.9%, and if you only held gold, you would have had a CAGR of 16%. The max drawdown for small caps was 60%, but if you added gold, it would have been reduced to 20%. Pure gold would have had a 15% drawdown.
• From January 2022 peak: The CAGR for small caps was 12.9%. If you added gold, the CAGR would have been 17.5%. If you only held gold, the CAGR would have been 20%, and the max drawdown would have been reduced from 25% to about 11%.

Let’s now look at the data from the bottoms. If you were able to precisely pick the bottoms, your returns would be different.

• From the 2004 May bottom: Small caps gave you a 16% CAGR. If you added 50% gold, it would have been 16.4%, but the max drawdown would have reduced from 75% to nearly 40%. With just gold, the return would have been 13.3%.
• From March 2009 bottom: Small caps gave you a 16.5% CAGR. Adding gold would have reduced it to 15%, and the max drawdown would have dropped from 60% to 20%. Pure gold would have given a 25% drawdown.
• From the 2013 bottom: Small caps gave a 17.5% CAGR. Adding gold would have reduced it to 14.5%, with the max drawdown dropping from 60% to 20%.
• From March 2020 bottom: Small caps gave you a 36.9% CAGR, even with the current drawdown. Adding gold would have reduced it to 26.9%, with a max drawdown of only 11%.

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You can see the benefits of adding asset allocation, especially gold, in this perspective. Whether you’re picking the best or worst entry points, the results improve significantly by lowering volatility and drawdowns. The 50/50 portfolio has done very well, coming close to small-cap returns in most cases, but with lower volatility and drawdowns. This is the core of it.

Also, from August, for example, small caps were down 14%, while gold in INR terms was up 18%. This negative correlation is almost perfect and is what gives fantastic results when you add gold to your equity portfolio, particularly with small caps due to the high volatility. This really plays well.

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