Why Smallcaps Will Outperform the Nifty

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

So markets have been roaring. Midcaps and smallcaps are also performing and hitting new all-time highs. Where should you park your money, largecaps, midcaps, smallcaps?

Well, if you look at the momentum for last couple of months, especially from the August, largecaps are strongly outperforming, especially the Nifty, which has gained the strong momentum comparing it with the midcap and smallcap.

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Largely, it was led by IT, Reliance, the banks, a couple of banks not all banks yes, the Bank Nifty is underperforming against the Nifty. But if you look at the Nifty, it's strongly outperforming against all these sectors.

If you remember, in February, I guess precisely 17 February, we released a video that smallcaps will outperform against the Nifty. Since February to July or I would say end of July, smallcaps were strongly outperforming against in Nifty, and then when the August breakout happened, when Nifty moved out of the range in June and July, largecaps or Nifty outperformed against the midcaps and smallcaps.

But if you look at the momentum now, it's been slightly we think that now it could be a pause to the momentum for largecaps and the midcaps and smallcaps will take over.

In the same video, we highlighted the Nifty to smallcap ratio chart. Look at this first chart over here. This is the weekly chart of CNX smallcap, which is Nifty smallcap to Nifty 50.

 

Like the same chart we highlighted in our video, which was released in February, it's indicating that the bullish head and shoulder breakout which has happened on this chart will take smallcap much higher than the Nifty. That breakout was after a multiyear underperformance of smallcap.

Now it rallied by around 27-28% post breakout, which means that smallcap outperformed by around 25-26% against the Nifty, and then it retraced back towards in the lower level.

 

So if you look at the second chart over here, the retracement is right at the support level or I would say the dip which happened from July or end of July to September, it has been taking support at the rising channel over here.

Plus, the most important part over here is the golden ratio is visible on the moving average. So basically the golden ratio or golden cross ratio is when my short term moving average takes over the long term moving average. So 50 days taking over the 200 days average. In this case, I have used exponential moving average. Generally Golden Cross is the simple moving average but even if you look at the EMA which is the exponential moving average, the theory is placed the same.

So if you look at it, the first time since 2014, the Golden Cross is visible on the smallcap to Nifty over here, and it is very, very strong, comparing with Nifty. So this indicates that there is still a huge room for smallcaps to outperform against the Nifty.

If I just look at the history, what happened in 2014, when the Golden Cross happened, the outperformance was around 46% for smallcap over the Nifty. If in case history repeats, we think that there is a huge potential for next 1 year, probably by end of 2022, we might see the smallcap strongly outperform against and Nifty. So you should not miss this scenario or opportunity, where the smallcap is outperforming against the Nifty.

 

If you look at this smallcap index chart over here, the third chart, this is very, very indicating a strong bullish scenario over here. So the price is breaking out, retesting those levels, again breaking out, retesting those levels, and now the fresh momentum breakout is visible where smallcap is trading at all-time high.

Again, as I said, the reversal, which was happening in the ratio chart over here, indicating that the outperformance could continue for smallcap after a dip or after a breather for smallcap and we are heading for much higher into the smallcap.

 

If I just go to a slightly lower timeframe, comparing with the smallcap index chart, the same breakout, which was a recent breakout, is in the form of cup and handle. So cup and handle is basically the bullish a technical pattern which indicates that the momentum after consolidation is breaking out in a stronger way towards a new highs.

Even if you look at the momentum, it was breaking out with the gap. So when these patterns break out with the gap, it indicates that the momentum is very, very, very strong for the bulls. There is a candle stick pattern called gapping play, and that indicates that when the gapping play pattern happens, the momentum on the positive side continues.

So again, all the structures over here, the ratio chart, the CNX smallcap indicates that we are heading for a huge bullish momentum for the smallcap index.

In case, I would repeat, in case you have missed the 17 February video, go to our past videos and you can watch that video where I highlighted the bullish head and shoulder breaking out of the ratio chart and smallcap will strongly outperform.

I believe 2022 might be the year for smallcaps as well and you should cherry pick the stocks, which will be out of this smallcap index and keep a watch on that.

So signing off. In case you think that our videos are helping you out, do not forget to comment and click on the subscribe button in case you haven't yet subscribed to our Equitymaster channel.

Signing off. Brijesh Bhatia.