Nifty below 50-DMA! Expect volatility in small & midcaps in coming weeks, caution experts

Bulls failed to hold on to Budget week gains as Sensex and Nifty50 lose steam amid US Fed jitters for the week ended 11 February.

Bears took control of D-Street and pushed the Nifty50 below the 50-DMA placed at 17,464. The next big support is placed at 17000, and 200-DMA placed at 16,775.

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The fall in the index was weighed down by selling by foreign investors (FIIs) as well as US inflation data which raised fears of a steep rate hike by the US Fed and on the domestic front, state elections in 5 states also weighed on sentiment.

FIIs have pulled out by about Rs 10,000 cr from the cash segment of the Indian equity markets so far in February.

The S&P BSE Sensex, and Nifty50 fell 0.8 per cent each for the week ended 11 February while Small & midcaps indices underperformed.

The S&P BSE Small-cap index plunged 3.4 per cent while the S&P BSE Mid-cap index was down 2 per cent in the week gone by.

Much of the volatility on D-Street was fueled by weak global cues, and long-term investors can use the dips to buy into quality stocks.

The volatility will only increase in near future especially in the small & midcap space, suggest experts and traders should lighten any leverage bets.

A rise in interest rates by the US Fed will hit equity and currency markets in near future, suggest experts.

“US inflation has hit a multi-decade high of 7.5%, which has implications on the pace of interest rate increase by the US Fed. As we suggested earlier, this will lead to higher volatility in all financial markets, including equity, debt, and currency,” Naveen Kulkarni, Chief Investment Officer, Axis Securities, said.

“We expect emerging market currencies to be under pressure, including INR. We also expect Indian interest rates to increase despite dovish RBI in the week gone by. This will have implications for equity investors. We expect this increased volatility to hit small / midcaps more than large caps,” he said.

Kulkarni further believes that the expected increase in volatility should be used by investors to build positions in quality large-cap and midcap stocks.

Wealth Erosion:

The BSE-listed companies erode the market cap of over Rs 4 lakh crore on Friday. The market breadth favours declines, advance-decline ratio at 2:7, while volatility index rises over 5 per cent.

For the week investors lost Rs 3.8 lakh cr. The average market capitalization of the BSE-listed companies fell from Rs 267.71 lakh cr on 4 February to Rs 263.89 lakh cr on 11 February.

Technical Take:

The Nifty50 closed below 17400 levels after reclaiming 17600 in the previous session. Friday’s price action wiped out most of the gains made during the week.

Post the RBI Policy meeting, it seemed that the market was geared for a resumption of the positive momentum as the Nifty as well the Bank Nifty index reacted positively.

However, the focus shifted back to global cues which saw a sell-off in equities due to the rising U.S. Bond yields. It looks like the index is consolidating in a range and investors should wait for a decisive breakout or a breakdown before building fresh positions on either side.

The Nifty50 recently formed a high around 18300 first, followed by intermediate highs of 17800 and now 17640.

On the flip side, the intermediate lows of 16410, 16830, and then at 17040 indicate higher low formations.

“Such structure of ‘Lower Highs and Higher Lows’ in the index are usually formed in a consolidation phase which indicates that Nifty is consolidating within a ‘Symmetrical Pattern’,” Ruchit Jain, Lead Research, 5paisa.com, said.

“Until we see a clear breakout from this consolidation, the market is likely to continue such directionless moves and hence, the focus should now be on stock-specific trades,” he said.

The support end of the mentioned ‘Triangle’ pattern would be seen around 17130-17150 while 17570-17600 would be seen as resistance.

“For the coming week, we expect Nifty to trade within this range and only a breakout on either side would lead to the next directional move. Hence, traders are advised to focus on stock-specific trades and avoid aggressive positions until we see a breakout on either side,” added Jain.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)