Over 90% stocks in Nifty 500, midcap, smallcap trading above 200 DMA

In August 2023, the midcap and smallcap segments outperformed largecaps, driven by an increased buying in media and consumer durables

More than 90 percent of the stocks in Nifty 500, Nifty MidCap 100, and Nifty SmallCap 100 are trading above their 200-day moving average (DMA), data from Bloomberg shows. According to analysts, this indicates that they are potentially nearing an overbought zone.

Currently, around 452 or 90 percent firms in Nifty 500, around 95 companies in Nifty MidCap 100 and 90 firms in Nifty SmallCap 100 are trading above the 200 DMA.

The 200-DMA is a valuable tool in technical analysis, representing the average closing price of a stock over the past 200 days. It helps assess a stock's momentum, relative to its current price.

Why many stocks are trading above 200-DMA level

Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities, said the widespread participation across various sectors signals a broad-based rally, indicating a structural bull market rather than a bubble in a few concentrated sectors, like the 1998-2000 technology, media, and telecommunications (TMT) boom.

However, a large number of stocks trading above their 200 DMA levels raise a cautionary flag for bullish investors.

In August 2023, the midcap and smallcap segments outperformed largecaps, driven by an increased buying in media and consumer durables. Bollywood blockbusters boosted movie exhibition and television stocks, while sectors like sugar, chemicals, defence, PSU Banking, paper, power, and fertiliser showed promise.

Notably, several midcap stocks, like IRFC, BHEL, JSW Energy, Adani Power, Gland Pharma, GMR Airports, Trent, Bharat Forge, and Supreme Industries, gained over 20 percent. Investors also showed heightened interest in the PSU and power sectors, according to analysts.

In the past year, within the Nifty 500 universe, 33 stocks delivered returns exceeding 100 percent. Additionally, 22 stocks yielded returns ranging from 70- 100 percent. In Nifty MidCap 100, eight companies saw gains, surpassing 100 percent, with five companies giving returns between 70 and 100 percent.

Meanwhile, the Nifty SmallCap 100 witnessed 14 companies delivering returns of over 100 percent and nine companies yielding returns between 70 and 100 percent.

"From here, the market is likely to see a style and sector rotation. With the strong catch-up by midcaps and smallcaps in the last couple of months, we believe that their margin of safety at current levels has reduced, as compared to largecaps. Keeping this in view, the broader market may see some time correction in the near term and flows are likely to shift to largecaps. However, the long-term story of the broader market continues to remain attractive," said Axis Securities in a latest note to investors.

The upcoming state and Parliament elections next year, and the path taken by central bankers on the change in policy stance could provide interim bouts of volatility, analysts said.

Reduce exposure in high-beta midcaps

"We recommend investors to reduce risks in their portfolio by cutting exposure to lower quality and high-beta midcap and smallcaps, and to increasingly invest money in higher quality larger stocks," Vakil added.

Rajesh Palviya, analyst at Axis Securities, said that the market observed a price and time correction, with the index dropping from 19,867 to the 19,200 levels in August. The price action for the month formed a bearish candle, indicating a lower high, lower low pattern, compared to the previous month, signifying caution or negativity in market sentiment during that period. However, it's important to note that the index is still in a strong medium- to long-term uptrend, so these small corrections are viewed as opportunities for buying and accumulation”.

"In the near term, any correction towards the 19,000-18,800 levels should be seen as buying opportunities. The index has the potential to extend its rally and reach levels towards the 19,800-20,000 levels.  Our bias remains positive, and we anticipate a potential sector rotation within this bull market," Palviya added.

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