We’ve had five down months in a row now. This happened in the mid-90s the last time we had five down months in a row. I think six down months in a row have not happened for the last many decades. And if March were to be a down month, it would be one of the rarest of rare occurrences. I am reasonably sanguine that March will not be a down month, but we have started on a poor note. However, the entire month of March is still there, so I’m not really worried about that.

We are extremely oversold. FIIs are, of course, still selling, and people are still very, very fearful. The commentary from experts is all over the place, with predictions ranging from 18,000, 16,000, to 19,000. Even experts are now throwing in the towel in a big way, and the narrative is gradually becoming extremely fearful. That is usually when some sort of intermediate bottoms happen. It hasn’t happened yet, but one must remain hopeful about that.

Is this the worst fall since COVID on small caps? In this video, we’ll take a data-oriented approach to compare the current situation with past falls.

Where is the market headed?

Market Overview

Nifty ended the day absolutely flat. We were down for some time, but the close was flat at 22,100. As you can see from September, we’ve just been falling. While earlier we were used to markets going up every month, now we’ve become accustomed to markets going down every month, and that needs to change sometime soon.

Nifty Next 50

Nifty Jr, surprisingly, which was down almost 1% in the first half of the session, made a fantastic comeback. It climbed from 56,200 to almost 57,800 and closed 1% higher. So, a very good reaction from Nifty Junior. Of course, the downtrend isn’t yet overcome, but it was a good day for Nifty Junior with a 1% gain.

Nifty Mid and Small Cap

Mid-caps stayed at +0.16%, a nice pin candle on mid-caps. So, despite all the weakness of the day, the close was slightly green.

Small caps also recovered some of the lost ground today, still closing at -0.64%, but very much off the bottom of the day at 13,400, closing 300 points higher from that point. There has been some attempt today to build back and recover from the bottom.

Nifty Bank Overview

Bank Nifty has retested its 2025 bottom for the third time now, near 47,800, and closed at -0.48%.

GOLD

Gold in Indian rupee terms was up by 0.21%. I’m actually surprised—given that the US-Ukraine agreement is off the table, gold should have been flying. But it hasn’t happened, and it could indicate that gold is in an intermediate downtrend. It might complete that cycle before starting to go up again. Despite all the news about Trump and Zelensky mentioning World War III and the regrouping behind Ukraine by all the European nations, gold didn’t see a dramatic rise, which shows how market expectations can sometimes not translate.

Advanced Declined Ratio Trends

The market breadth today was reasonably even. Most sectors had an equal number of advances to losers. For example, Nifty 500 had 229 advances to 269 losers, just about even. Nifty 100 and Nifty Next 50 performed well. Nifty Junior had 33 advances to 17 declines, and Nifty 50 had 32 advances to 18 declines. So, a good breadth from a balanced perspective. Looking forward, despite Reliance and HDFC Bank, the two biggest heavyweights in Nifty losing 2.4% and 1.78%, respectively, Nifty still managed a flat closing. That is really good. Without these two heavyweights, Nifty managed a flat close, and when these two start to come back, it will help Nifty move up.

Nifty Heatmap

Wipro, UltraTech, JSW, Grasim, Bharti Airtel, Aisha Motors, and Bel all did well. On the other hand, SBI Life, Bajaj Finserv, Maruti, Hindustan Unilever, and Bajaj Auto saw some losses.

Nifty Junior saw strong moves in several stocks like Siemens (up 4.6%), ABB (up 3.1%), BHEL (up 3.5%), HAL (up 3.2%), TVS Motors (up 4.4%), Varun Beverages (up almost 5%), Vedanta, Adani Green, DLF, REC, and PFC. So, some very good moves, especially in financials and real estate, possibly indicating expectations of a rate cut. Jio Finance did quite badly, down 3.2%, with ICICI, Union Bank, and LIC also losing ground.

Sectoral Overview

On the sectoral side, defense was the highest-gaining sector, up by 1.5%, followed by real estate, public sector enterprise, and metals, which were up 0.8%. Tourism, commodities, and MNC stocks were behind that. On the losing side, oil and gas were down 0.8%, and the capital market sector continues to bleed, down 2.4%. Stockbrokers, depositories, and stock exchanges have taken a beating, and those stocks have fallen almost 11% in the last week and month. These stocks should ideally consolidate and recover once the market is ready to move up.

Sectors of the Day

Nifty IND Defence Index

Story of the Day

Is this the worst fall since COVID? We’ve had the worst monthly performances on small caps since the COVID period. If we look at the last five years, February had a 12.6% fall, January 10.7%, and prior to that, we had February 2022 at 9.4%, and March 2020 had a 33% drop in a single month. These are some of the biggest falls in the last five years. Having had two consecutive months of steep fall this time makes it particularly significant.

When we look at the small cap 250 segment, only 1% of stocks have fallen less than 10%. 6% of stocks have fallen between 10% and 20%, 14% between 20% and 30%, while the majority—58%—have fallen between 30% and 50%, and 20% have fallen more than 50%. So, 78% of small cap stocks have lost more than 30% from their peak. If you are holding stocks in this bucket, it’s not so bad since most of the market is in this position. If you’re rotating out of these stocks, there’s hope for better returns.

Interestingly, Nifty Next 50 stocks have also seen similar drops, with 68% of them down by 30% or more, which mirrors small cap performance. Mid caps have taken a similar hit, with 65% of them down by over 30%. The only outlier is Nifty itself, which is slightly different, but the rest of the market beyond those top 50 stocks has seen highly correlated damage.

The small cap 250 index is very close to its 52-week low, with a drop of 26% from the 52-week high. Historically, the small cap index doesn’t stay below the 52-week low for long. Looking at the granular data, 86% of stocks have been weaker than the benchmark. Many stocks have dropped more than 1.5 times the benchmark, and there are no stocks that have fallen more than three times the benchmark.

In the past, we’ve seen deep corrections, but history suggests that we’ve had extremely good rallies post-correction. After every steep correction, there has been a steep rise. Whether this correction will stop here or go further down remains uncertain, but the outcome post-correction is usually very positive.

Regarding our allocation to small caps, the idea is to hold on. The recovery will come, and we’ll never be able to catch the bottom. We shouldn’t wait endlessly to deploy capital, even if it may sit in cash or in defensive stocks. We cannot time the market—either when it’s topping or when it’s dropping. Small caps will typically experience deeper corrections than large caps.

As seen in 2020, small caps had a 62% correction, compared to 14% on large caps. In 2021, we saw a 28% correction in small caps versus 13% in large caps. Investing in small caps carries more risk, but the potential rewards are much higher when played right. The post-COVID rally showed that large caps went up 134%, while small caps went up 255% in two years.

However, small caps are volatile and can cut you on the downside. If you’re seeking lower drawdowns, large caps may be a safer bet, and you could also look at asset allocation with some debt or gold for even lower volatility. But the pain of small caps is something you have to bear if you’re after the higher returns they offer.

In the past, markets have always caught people on the wrong foot. It is tough to predict when the bottom will come, when the top is near, or what sectors will lead. Hence, a systematic approach to investing works better, not only for the results but also for your peace of mind. Why would you want an investing journey where you lose sleep over it?

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