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Hint of Caution! Midcap index could see a fall of up to 10%; should you invest ?

Fortunescript- After Budget Effect decode -2018(open attachment)
The Budget proposed 10% long-term capital gains tax (LTCG) which is weighing on investor sentiments on Friday. The fall was led by a sharp correction in the small & midcap stocks which have plunged up to 30 percent in a single day.
The star performers of the year 2017 – the S&P BSE Midcap and the Smallcap indices came under pressure from the start of the year 2018 even though the benchmark indices rose to fresh record highs.

The S&P BSE Midcap index rose 48 percent while the S&P BSE Smallcap index rose by about 60 percent compared to 28 percent rally seen in the S&P BSE Sensex, and about 29 percent rally in Nifty50.

The Budget proposed 10% long-term capital gains tax (LTCG) which is weighing on investor sentiments on Friday. The fall was led by a sharp correction in the small & midcap stocks which have plunged up to 30 percent in a single day.

Analysts’ advise investors to stick to quality stocks if somebody is planning to buy stocks on declines as valuations have exceeded long-term averages and look slightly stretched.

“There are two parts to the fall seen today in the market. The broad market is reacting negatively to the excessive focus on rural and social schemes and the return of LTCG tax. There is stock specific pressure due to un-winding of positions in high beta stocks,”

“Market will take few days to absorb these proposals. Investors should be looking at buying into quality names in insurance, like Bajfin and others like BEL, which has corrected sharply in past few days. Besides these L&T, and rural economy focussed companies like Escorts, M&M, PI etc. with one-to-two years’ time frame,”

The mid and smallcap stocks popularly known as high-beta stocks suffered a double-digit fall of up to 20-30% so far in the year 2018. And, the warnings signs look visible that the broader markets are on a course of correction which could extend up to 10 percent on the index level.

Nifty Midcap:

The Midcap Index has been underperforming the headline Indices from the start of 2018 led by profit booking. Further, it has turned down after hitting the upper end of a channel pattern, currently approaching the lower end of the channel placed at 19800. However, immediate supports are placed between 20285-20200.

Moreover, a sustained trade above 21000 can halt the current corrective phase taking the Index to new highs of 22190. RSI has also eased off from overbought levels suggesting higher levels in the coming trading sessions.

Nifty Smallcap:

The index is down 3.5% so far in 2018 underperforming the headline Indices. Further, it turned down from the upper end of the channel after reaching overbought levels. Immediate support on the downside is placed between 8620-8300 being 38.2% & 50% Fibonacci retracement levels respectively.

Correction to these support levels can be used to accumulate stocks gradually as the major trend remains upward bias. Resistance on the upside is placed at 9400-9650. The RSI has cooled off from overbought levels suggesting resumption of the uptrend in the offing.

Disclaimer: The views and investment tips expressed by investment expert on Fortunescript.com are his own and not that of the website or its management. It advises users to check with certified experts before taking any investment decisions.