Stock Market Crash: Smallcap & Midcap Stocks Face Biggest Drop Since 2020

The Indian stock market has witnessed a severe downturn, with smallcap and midcap stocks experiencing their sharpest decline since the March 2020 Covid-induced crash. Retail investors have suffered significant losses as widespread selling gripped the broader market in February. The BSE Smallcap index plummeted by 14%, marking its first double-digit monthly drop since the pandemic, while the Nifty Midcap 100 fell by 10.8%.

Sharp Declines Across Smallcap and Midcap Stocks

An analysis by the Economic Times (ET) reveals that within the 938 stocks on the BSE Smallcap index, 321 companies saw their stock prices nosedive by over 20% in a single month. Some of the hardest-hit stocks include Vakrangee, Zen Technologies, Oriental Rail Infra, and Suratwwala Business Group, which tumbled between 40% and 66%. Additionally, 243 smallcap companies are now trading at less than half their 52-week peak values.

The Nifty Midcap 100 reached its lowest level since March 27, 2024, while the Nifty Smallcap 100 fell 3% to register its lowest closing since March 19, 2024. Persistent selling pressure, global economic concerns, political uncertainty, and liquidity challenges in smaller stocks have significantly eroded investor confidence.

Market Analysts Issue Warnings

Pratik Gupta of Kotak Institutional Equities has maintained a cautious stance on small and midcap valuations. He warns that despite the correction, valuations remain expensive in many cases. "We remain negative on the outlook for small and midcaps due to stretched valuations. Even after the recent decline, they have not corrected sufficiently," Gupta stated.

He highlighted several factors contributing to the downturn, including concerns over a potential global economic slowdown, weakened agricultural income due to poor monsoons impacting construction, and declining domestic retail investment in equities. Additionally, local mutual funds, insurance firms, and portfolio management services (PMS) are witnessing slowing equity inflows, with investors shifting their focus from small and midcaps to large-cap or balanced debt-equity funds.

Technical Breakdown Raises Further Concerns

Sudeep Shah, Deputy Vice President and Head of Technical & Derivatives Research at SBI Securities, noted significant technical weaknesses in both indices. "The Nifty Midcap 100 has dropped below its 100-week Exponential Moving Average (EMA) for the first time since August 2020, while the Nifty Smallcap 100 has remained below its 100-week EMA for the past three weeks. The 14-week Relative Strength Index (RSI) is in bearish territory and declining, indicating further weakness."

Key levels to monitor:

Nifty Midcap 100: Immediate support at 47,200-47,000; a drop below 47,000 could push it further to 46,400. Resistance stands at 48,800-48,900.

Nifty Smallcap 100: Support at 14,200-14,100, aligning with the 50% Fibonacci retracement from its previous rally of 8,682 to 19,716. Resistance is at 15,100-15,200.

Earnings Disappointments Worsen the Sell-Off

Rajkumar Singhal, CEO of Quest Investment Advisors, pointed out that disappointing earnings have exacerbated the sell-off in small and midcap sectors. "Despite the market correction, smallcap valuations remain above historical averages. The pain may persist until earnings recovery in CY25, but a bottom-up approach focusing on quality stocks with strong balance sheets and sustainable growth is advisable."

Contrasting Views on Market Outlook

Market experts hold varied opinions on the future trajectory of small and midcap stocks. Dharmesh Shah of ICICI Direct remains optimistic, drawing insights from historical market behavior. "Over the last two decades, midcaps and smallcaps have corrected 25-30% during bull markets before rebounding strongly," he noted, while acknowledging that further downside is still possible. He sees potential investment opportunities emerging in quality stocks within this segment, anticipating a recovery in the next quarter.

On the other hand, market strategist Nischal Maheshwari advises a selective approach. "Investors should focus on sectors with attractive valuations. If certain small and midcaps have corrected adequately and present compelling value, they can be considered selectively."

Navigating Market Uncertainty

With global economic uncertainties, pre-election volatility, and weakening technical indicators, investors are at a crossroads—whether to enter the market at current levels or adopt a wait-and-watch strategy. The coming months will be crucial in determining if the current market slump stabilizes or deepens further. Investors are urged to exercise caution, prioritize fundamentally strong stocks, and adopt a long-term perspective while navigating these turbulent market conditions.