Should You Invest in Small-Cap Stocks?

Jun 28, 2022

Brijesh Bhatia, Research analyst

Smallcaps have faced the brunt of this market correction. The smallcap index is down more than the Nifty.

But is the trend reversing? Will we see smallcaps outperform largecaps again?

In this video, I'll answer these questions with the help of my technical charts.

Watch the video and let me know your thoughts.

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

In this video I'll be discussing as the market has reversed right from 15,200 levels on Nifty, back towards 15,800 levels, and in this case, should you buy the small-cap stocks? And what are my views on the small-cap index?

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Before that, in case you have missed my video, Is the market correction Over, I discussed Dow Jones and Sensex charts, and markets are taking supports at long term trendline on the long term support zone on Dow, which I have highlighted at 29,500-29,800 and for the Sensex, I have highlighted between 49,000-51,000, and markets have been taking support around these levels as of now.

But in the market reversal is it a good time to look for small-cap stocks? Let's look at this first chart over here which is the small-cap index chart.

 

If you look at the chart right from 2014-2015, if I just look at the trend line where the breakdown happened, the highs were holding, and now the breakout happened out of this a trendline on the bullish side.

It is coming back to retest that support and if you look at the recent, last week, the stock has turned positive again right at the support of the trendline.

Plus if you look at the orange line over here, it is again the 200 weekly exponential moving average, where it is taking support as well. So 200 weekly exponential moving average, basically is known as the long=term moving average and generally it has been used as Golden Cross.

When the 50 days exponential moving average crosses above the 200 which means the short term crosses over the 200 days, but in this case, I'm taking the 200 weekly average which is again a long term chart, long term support, which plays a key, important role.

If you look at the previous in 2019 as well, it broke out of the 200 days average, re-tested the 200 days average, and continued the bearish momentum.

In this case, it has broken above the 200 days average back in 2020, re-testing in 2022 again, which will as a support zone.

Additionally, the trendline also around the same level indicates that 7,800-7,900 turns out to be an excellent support. We made a low around 7,910 and coming back to 8,500 level. It is a strong momentum right from the lows right around 8-9% coming back on a weekly scale is an again a stronger support reversal.

 

Second, if l look at the chart over here, which I have indicated in 2021 as well, if you look at the structure, this is the smallcap divided by Nifty 50 chart, and this is the ratio chart.

Ratio charts are basically used to identify the outperformance and underperformance of an instrument against the other. So when the ratio goes higher, it means that if you look at the numerator, which is the CNX smallcap index, or the Nifty smallcap index, the ratio going higher means that smallcap index is outperforming against the Nifty 50. The ratio going down means that the Nifty is outperforming against the smallcap.

Now right from 2018, smallcaps were underperforming, i.e. Nifty was outperforming. Largecaps were outperforming against the smallcaps. Back in 2021, the start of 2021, we saw that the bullish head and shoulder structure has been broken out of on the ratio chart.

Now the bullish head and shoulder structure breakout means that smallcap index will outperform against the Nifty. We saw that rally back in 2021 were smallcaps were rallying faster than the largecaps.

Back in 2022, the ratio reversed. We saw a retracement, and now that retracement is retesting the breakout of the bullish head and shoulder, which is, as per technical analysis the breakout retest is an opportunity to look at excellent, low-risk high-reward trades.

So I believe looking at the structure, smallcap index could see an outperformance against the Nifty and it is an excellent time for smallcap stocks to look at, which are outperforming in the smallcap basket, which are also outperforming against the Nifty 500. Look at the structure where they are very, very bullish fundamentally as well.

 

The third chart I want to highlight over here is the Russel 2000 US smallcap index over here. Now, if you look at this index over here, at right at 2007-2008, the breakout happened, it did a re-test in 2020, though it was slightly higher, but if you look at the daily chart, it has made a low at similar levels.

Back in 2021, it broke out above the previous couple of highs and now it has been re-testing the same highs again, somewhere around 1,700 levels.

So I believe this is an excellent opportunity where the breakout retest happens and if you look at the lower panel over here, when the RSI tested around 35 to 30 zone on the Russel 2000 index, it gives an excellent reversal sign.

Again, the momentum acts as a support plus the RSI into the oversold level or into the demand zone, indicates that the Russel 2000 index could see a reversal and which could again benefit us as we are a follower of US markets.

Russel moving higher means smallcap index could follow the footstep of the Russel, and we may see the structure heading higher. Remember smallcap index is also trending at 200 weekly exponential average, the trendline, the ratio chart is indicating it's time for smallcap index to head higher.

So I believe it is an excellent time for an investor to look for outperformance of the smallcap over the Nifty and the stocks which are outperforming the smallcap index or the CNX 500 could be an excellent opportunity in the markets to accumulate the small-cap stocks.

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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