Over the past few months, smallcap stocks have been subject to severe selling pressure; last week, the NSE's Nifty Smallcap 100 and Nifty Smallcap 250 indexes entered a bear phase, falling more than 20% from their respective peak levels. After reaching its all-time high of 19,716 on December 12, 2024, the Nifty SmallCap 100 index fell 23.7% (4,672 points) to a low of 15,044 in intraday trading on Monday.
On Monday, however, the Nifty SmallCap 250 index fell more than 24% from its peak on September 27, 2024, to a low of 14,145. During this period, nearly 60% of Nifty SmallCap 250 stocks lost more than the SmallCap250 index. According to analysts, the sharp drop in smallcap stocks over the last few months may signal a capitulation phase as investors cash out and rush to protect their capital, trim losses, and shift to safer havens.
By definition, 'capitulation' refers to the phenomenon in which investors liquidate their positions during periods of prolonged stock price decline for fear of incurring a larger loss. This panic selling could even occur as a result of margin calls and increases in futures and options (F&O) margins, among other factors. On the other hand, some believe that capitulation can result in the exhaustion of selling pressure, creating a new buying opportunity. "The smallcap index has fallen sharply from its peak, entering a bear phase. However, I don't rule out a brief pullback rally. Smallcaps appear vulnerable when compared to their midcap counterparts and may fall further, potentially leading to capitulation. At the index level, we can expect a 5-8% drop in smallcaps, with individual stocks falling much further," said Ajit Mishra, senior vice-president for research at Religare Broking. Mishra sees support for the Nifty SmallCap 100 index at 14,950 and 14,400, while any rise will be met with resistance at 15,670 and 16,200.
Capitulation, meanwhile, is heavily influenced by various market news, FII inflow/outflow, fear of missing out (FOMO), and so on. The situation typically lasts several days to months and can have a significant impact on investments. During such times, investors tend to shift from one segment to another. Investors may find equity to be risky at times and thus shift to bonds, commodities, currencies, and so on. This shift may exacerbate the market's instability.
Sharp Underperformance
During the fall, the majority of Nifty SmallCap 100 stocks underperformed, losing more than the smallcap index. Sterling & Wilson Renewable Energy (SWRE) and Jupiter Wagons were the biggest losers, falling around 45 percent each in less than two months.
According to ACE Equity data, 28 of the Nifty SmallCap 100 stocks, or nearly one in every three, fell by more than 30% during this time period. Stocks that suffered significant losses included Tejas Networks, Natco Pharma, BEML, Data Patterns, NCC, Sonata Software, KEC International, CESC, Angel One, Ircon International, Cyient, Railtel, HFCL, Rites, PVR Inox, and IFCI.
Furthermore, as per G Chokkalingam, founder and head of research at Equinomics Research, the sharp drop in the small-cap segment has created a dichotomy within this segment, with some pockets, such as new-age companies, digital businesses, renewable energy, and so on, reaching extraordinary valuation multiples during the peak.
"The majority of them have suffered significant losses, but many continue to trade at high levels. As a result, small-cap stocks trade significantly above the Sensex's trailing PEs. "A large number of smallcap stocks with high price-earnings (PE) multiples may experience additional pain over the next six weeks," he said.
