Correction in Overheated Mid and Small-cap Stocks Dampen Market Sentiment

The level of pessimism has risen in the stock market, leading to a precautionary approach to book profits on a notion that the valuation has extended beyond the rationale, said Vinod Nair, Head of Research at Geojit Financial Services.

The correction is happening on mid-caps, while large-caps are maintaining their strength, he said.

This cautious trend can prevail in the short-term, but the end-game is on the rise of the domestic economy, surprising upside in corporate earnings, and change in domestic investment patterns, which is expected to continue on a long-term basis, he said.

Aditya Gaggar, Director at Progressive Shares, said bears were seen back in action. After the record opening at 20,100 by Nifty50, a complete reversal was seen to trade lower. Freefall in the overheated mid and small-cap stocks dampened the market sentiment further and put pressure on the Index; however, strong support from IT stocks helped the Index to end the session at 19,993.20 with a minor loss of 3.15 points.

The Sensex closed at 67,221.13, up 94 points, or 0.14 per cent.

On the sectoral front, media and realty stocks were the major laggards. With a massive cut of 3.07 per cent and 4.10 per cent, mid and small-cap indices underperformed the frontline index.

Nifty50 has made a bearish candlestick pattern with a divergence in RSI which indicates minor correction/consolidation going forward, Gaggar said.