Mid and smallcaps get money from Nifty lag

The advance-decline ratio (ADR), a widely viewed indicator of overall market health, was above one for the month of May, pointing to growing investor confidence in mid- and small-cap stocks despite weakness in the headline index.

The monthly average ADR reading of all BSE stocks continued to be strong as the ratio remained above one for two consecutive months. In May, the ratio was 1.06 while the April reading was 1.5, the highest since June 2020 in nearly six years. In June, the ratio rose to 0.86 as of Monday.

“Domestic investors continued to pour money into equities and midcaps,” said Jay Vora, technical analyst at Mir Asset Sharekhan. “However, large-caps took the brunt of the overseas sell-off,” he said.

The Nifty Midcap 100 index hit a record high in May and rose 3.2% during the month, while the Nifty Smallcap 100 index gained 0.7%. Benchmark Nifty and Sensex fell 2% and 2.8% respectively.

Nilesh Jain, VP-Head of Technical and Derivatives Research, Centrum Finvers, said, “The benchmark Nifty and smallcap indices remained 8-9% away from their peaks in May, while the midcap index touched fresh new highs for the month.”

“This showed the difference between the advance-decline ratio and the benchmark Nifty,” Jain said.

Jain added that smallcaps fell 24% from the peaks but recovered around 20% indicating that the rebound could be sustained.

A rising advance-decline ratio means more stocks are rising and the market is strengthening. While the benchmark Nifty is likely to remain in range, the broader market is expected to outperform relatively.

“The midcap index is above its breakout level in May and the smallcap index is also bullish,” said Vipin Kumar, AVP Equity Research & PMS (Derivatives and Technical Analyst), Globe Capital Markets. For the Nifty Midcap 100, gains may extend to 63,500 levels while the Smallcap 100 index is expected to test its record high around 19,600 in June, he said.

“Midcaps and smallcaps are likely to outperform while the Nifty is expected to remain in a range with a negative bias,” Jain said. “Largecaps currently do not look promising and are likely to remain under pressure,” he said.