The small-cap category is experiencing acute stress, with the market witnessing a third consecutive day of decline on March 13. This downturn has sparked concerns among investors and analysts alike, particularly as the benchmark Nifty 50 index also faces significant downward pressure, indicating widespread weakness in the market.
At 12:30 PM, the Nifty 50 was down by over a percent, while the number of declining stocks far outweighed advancing ones, with 3,333 shares in decline compared to just 422 advances. Furthermore, a staggering 869 stocks were locked in the lower circuit on the National Stock Exchange (NSE), underscoring the severity of the situation.
According to market participants interviewed by Moneycontrol, the ongoing weakness can be attributed to brokers advising clients to unwind positions due to heightened risk perceptions. Purvesh Shelatkar, head of the institutional desk at Monarch Capital, noted, “Brokers are asking clients to unwind positions. Market-to-market losses are increasing, and brokerages are urging investors to cut positions or provide additional margins.”
Key Indicator Flashes Warning Signs
Technical indicators are painting a grim picture as the sell-off intensifies. The Diffusion Indicator, which reflects the percentage of stocks trading above the 20-Day Simple Moving Average (SMA), has plunged to a 20-month low for the Nifty Small-cap 100 index. Merely 4% of stocks in the index are trading above the 20-Day SMA, down from over 90% at the beginning of the year, signaling a drastic shift from bullish sentiment to panic. Similar trends are observed in the Nifty 500 index, where only 11% of stocks are above the 20-Day SMA, compared to 77% earlier in the year.
At 12:50 PM, the Nifty Small-cap 100 index recorded a substantial decline of nearly 4%, exacerbating concerns over the segment’s stability. Over the past week, the index has plummeted by more than percent, while the Nifty Mid-cap 100 index also suffered a significant decline of 3.14%, falling 4.6% in just a week.
In response to the mounting frothiness in the broader markets, the Association of Mutual Funds in India (AMFI) issued directives to asset management companies (AMCs) on February 28. AMFI urged AMCs to implement policies aimed at protecting investors in small-cap and mid-cap segments, emphasizing the need for proactive measures such as moderating inflows and portfolio rebalancing.
As concerns persist regarding the resilience of small and mid-sized funds amid market turmoil, regulatory bodies like the Securities & Exchange Board of India (SEBI) are closely monitoring stress tests conducted by such funds.
