Will Mid and Smallcaps Outperform in 2022?

Jan 4, 2022

Brijesh Bhatia, Research analyst

In a video last year, I said midcaps and smallcaps would outperform the Nifty. That's exactly what happened. The broader market created a lot of wealth for traders and investors in 2021.

Will this trend continue in 2022? Will midcaps and smallcaps outperform the Nifty this year?

I answer this question in this video. Let me know your thoughts in the comments.

Hello viewers. Welcome to the Fast Profits Daily. Myself, Brijesh Bhatia.

In 2021, I did a video saying that smallcaps and midcaps will outperform against the Nifty, and we discussed the ratio charts. That's what exactly happened in 2021. Smallcaps and midcaps outperformed by a big margin against the Nifty. Will the trend continue in 2022?

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Well, let's look at the first midcap chart over here and what does this chart indicate?

 

So this is again the weekly chart of a midcap index over here and if you look at the trend line, the long line right from around 2007 highs, just previous to was the fall of 2008, we are witnessing a fresh trend line trendline breakout.

This is very, very rare phenomenon that when the rising trend line crossing the highs, breaks out on a bullish momentum.

Well, some might be confused that it is breaking out at a higher level, which could be risky. Yes, it can be risky but look at how is Sensex played out when a similar structure happened. Let's look at the Sensex chart over here.

 

So if you look at the red circle marked, since the highs, similar to 2007 and if I just draw the trendline, with the highs, we witness a break out right in 2020. I guess it was November or December 2020 when the trend line broke out. 2021 again was a bullish year for the benchmark index, which is Sensex over here, and look at the momentum which we have witnessed since the breakout.

Similarly, if we look at the midcap again, it's breaking out of the rising like. If I just go with the move, like in the Sensex what happened, I guess and I hope that this year the midcaps will continue to perform against the Nifty.

What about smallcaps? Let's look at the smallcaps chart over here.

 

This is again a weekly chart and if you remember, I have done a video in 2021. I showed a similar chart when it was breaking out of the trend line. If you look at 2014 it broke out of the trend line. It saw a huge rally till 2018, I guess mid-2018, and since smallcap has underperformed against the Nifty.

Similarly we saw you the breakout in 2020 again of the falling trendline and the momentum is still continuing. Till what till will the bullish momentum continue?

 

Well, let's look at the Fibonacci time cycle over here. This is the previous breakout which happened in 2014. Since 2007-2008 highs, in 2014 the breakout happened.

If I take 161.8% fib time which means that I just look at the consolidation from 2008-2014, it was somewhere around 325 weeks, and then we saw a rally of around 200 weeks which is 161.8 fib time. In simple terms, if you take 325 8 0.618 which is 61.8%, it comes to somewhere around 200-205. We saw a rally ending over there. Precisely it was 201-202 weeks of rally, which ended in around 161.8 fib time.

 

If I look at a similar historic move back in 2020 when it broke out, if I just look at 1.618, I think till May we might see that smallcap will continue to rally and it I am not indicating that the bull trend might end in May but probably we might see the slight consolidation going into the smallcap indices. But I think for next first of 2022, smallcap and midcap will continue to rally if I just look at the fib time.

Now one important chart you should keep a watch on the trend change in the smallcap is the smallcap to Nifty ratio chart.

 

What does this indicate? I've taken smallcap index price and divided it by the Nifty price. Now, if you look at the chart over here, again this is a weekly chart, the red line is 200 weekly exponential moving average of the ratio chart.

Now, since 2018, when the underperformance started, the ratio closed below 200 weekly exponential moving average, and it started underperforming. Start of 2021, it broke above the 200 weekly exponential moving average and the outperformance continued. I believe till on a weekly scale, the ratio is not breaking below 200 weekly exponential moving average, the outperformance of smallcaps will continue over the Nifty and you should not miss this rally.

Again, if I look at the fib time, the rally might continue in smallcaps till May or the first half of 2022. It might as well prolong looking at the structural move, which are witnessing into the equities. But yes, this year might see some volatility. Again, I'm not indicating that in the first half, the trend might end.

I think from the second half smallcaps might go into the consolidation and slight underperformance might happen against the Nifty, but still the trend is very, very bullish and you should keep a watch on this ratio chart which is a smallcap to Nifty.

In case it breaks the 200 weekly exponential moving average, the trend change happen and that's the point where you should lower down your smallcap portfolio and switch it to the largecaps.

So signing off Brijesh Bhatia.

Warm regards,

Brijesh Bhatia
Brijesh Bhatia
Research Analyst, Fast Profit Report
Equitymaster Agora Research Private Limited (Research Analyst)

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