Why Mid-Caps & Small-Caps Are Defying the Odds

Market Update - Thursday, 23 Apr

The market mood is softening once again, with no let-up in the price of oil. Brent crude has reached 104 dollars, and with Indian ships now being fired at, the safety of oil supply to India is in question. Oil-related stocks, particularly autos, which depend on lower oil prices, have taken a beating. While there was an expectation that this week would bring clarity regarding the market's direction, confusion continues to linger.

An interesting observation since the start of the war on the 1st of March is that the dynamics between mid-cap and small-cap stocks have completely changed compared to large-cap names.

Looking at the charts, there is a slump today of 0.84%. While the trends are negative, they are not yet alarming. Alarming would be a drop to fill the gap that exists between 23,223 and almost 23,600, as that would bring fear back into the market. The disappointment today is that the market did not break above the pivot to gain more confidence. The last five or six days of gains have been nullified, and the Nifty is back to where it was six days ago.

• Nifty Junior also saw its last two days of gains lost, finishing at minus 1.3%.

• Mid-caps were more shallow with a 0.41% loss, while small-caps saw only a 0.55% loss, indicating that the trend in the mid and small-cap space remains reasonably strong.

• Bank Nifty saw significant damage at 1.43%. Union Bank's results were quite disastrous, leading to speculation about whether all PSU banks will report similarly.

• Gold is also softening, down 0.52%, and is still unable to rise.

• Crude oil is up 2.3% to nearly 104, and on a monthly basis, it is heading toward a new all-time high close, as is the USD INR, which is trading at about 94.08.

Other Market Triggers

• Advanced decline trends were in favor of declines, with 338 declines to 161.

• It is a very lethargic market where many big names lost ground today, joined by autos and private banks.

• Only pharma was running up, with stocks like Dr. Reddy's, Cipla, and many mid-cap pharma stocks performing well, while FMCG took a break.

• The Nifty Next 50 heat map also showed pharma and some solar space doing well.

• Motherson lost ground, and other stocks like Union Bank at minus 7%, DLF, Canara Bank, Bank of Baroda, PNB, and VBL also lost ground as confidence shakes once again.

• In the mover of the day segment, Oracle Financial Services reported quarter four profits with good margin expansion and is up 8%. It has gone up almost from 6,200 to 8,800 in a very short span of time.

• Dr. Reddy's and Piramal Pharma are also up, demonstrating that whenever the market is in a defensive mode, pharma stocks take over.

U.S. Market Updates

• In the previous session, the US markets saw indices rise, with the S&P 500 up 1%, the Dow Jones up 0.7%, and the NASDAQ up 1.7%.

• Intuitive Surgical, Philip Morris, AMD, Boeing, and Broadcom all gained 5 to 7%. Some of these stocks could be part of the weekend investing US stock strategy, though these are not recommendations.

• The NASDAQ 100 heat map looked quite good in the semiconductor and chip space, with AVGO, MU, and AMD doing well.

• Apple recovered 2%, and Nvidia, Google, Microsoft, Amazon, and Palantir all did quite well for the US markets.

What to watch next ?

• The mid and small-cap segments have had enough and will likely not drop the way they previously were.

• The lower end of the market has been bought into by stronger hands, causing that segment to rise, while large-cap stocks are still being sold off by bigger players, resulting in a sluggish comeback.

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Recently, Travis Gatzemeier shared a compelling data analysis regarding the historical behavior of the U.S. stock market during recessions. Understanding how markets function during these turbulent times is not just an academic exercise—it is essential for long-term wealth preservation and growth.

The Anatomy of a Bear Market

Historical data over the last 100 years reveals a consistent pattern. When the U.S. economy enters a recession (represented by the grey bars in the data), the S&P 500 typically faces significant drawdowns.

These declines are not minor; they have ranged from 20% to as high as 80% from market tops. On average, these periods of market contraction have lasted about 20 months, with an average decline of roughly 40%.

The Bull Market Reward

The narrative often changes when a bear market hits, leading many investors to panic and exit the market entirely. However, history tells a different story. Every major decline has been followed by a robust bull market.

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The most important takeaway from this data is that bear markets are not the end of the road; they are the required precursor to a bull market. Think of the bear market as the "cleansing" phase of the economic cycle. Without this periodic correction, the market cannot reset, build a base, and eventually launch into the next phase of significant expansion.

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