Midcap, smallcap indices crashed 2% each today; here's why

Midcap and smallcap shares led the losses on Dalal Street today as benchmark indices ended sharply lower on the back of profit-booking and weak global cues. India VIX climbed 3.81% to 16.33 today, signaling heightened market volatility on Wednesday. Sensex slipped 790 pts to 72,305 and Nifty ended 247 pts lower at 21,951. The correction was led by the BSE smallcap index, which plunged 890 points or 1.94% to 44,998. The index crashed 1,011 points intraday. On similar lines, BSE midcap index declined 793 points intraday. The index ended 724.87 pts or 1.82% lower at 39,019.

On NSE, the Nifty midcap 100 index closed 952 points lower at 48,089. Similarly, Nifty smallcap 100 plunged 302 pts to close at 15,875.

The crash in the mid cap and small cap space came a day after market regulator Sebi asked asset managers to furnish more information to investors about the risks associated with their small and mid-cap funds, according to reports.

Concerned over the large fund inflows, Sebi asked mutual funds to impose a cap on fund flows into small cap and midcap stocks, and rebalance portfolios, among other measures, added reports.

In response to the Sebi directive, Association of Mutual Funds in India (AMFI) asked asset management companies (AMCs) to introduce a policy to protect investors in small cap and mid cap segments in light of the froth building up in the broader markets.

This was one of the major factor behind the crash in market today.

On the other hand, the BSE large cap index ended 104 pts lower at 8,504. This signaled large cap shares did not contribute much to today’s crash. Reliance Industries (down 2.07% or Rs 61), Maruti Suzuki (down 2.94% or Rs 338) and Shree Cements (down 2.10% or Rs 551) led the losses in the large cap space today.

BSE mid cap and small cap indices are trading near their record highs and weak sentiment in the market would impact these stocks the most, said analysts.

The BSE mid cap index climbed to its record high of 40,282 on February 8 this year. The small cap index touched an all-time high of 46,821 on February 7 this year.

Riyank Arora, Technical Analyst at Mehta Equities sees more upside in these stocks despite today’s correction.

"Midcap index fell by almost 862 points in a single trading session, touching a major support level of 48,000. As long as the benchmark is trading well above this level, we can expect good short covering to push the index higher towards 49,000 and 49,500 levels. On the other hand, the Smallcap Index almost touched a crucial support mark of 15,800 and managed to hold well above it. We can expect some short covering towards 16,240 and 16,340. Overall, we can anticipate good momentum in midcap and smallcap stocks, as both benchmark indices have touched their respective major support levels,” said Arora.

Abhijeet from Tips2trades said, “Nifty Midcap & Small cap indices look bearish on the daily charts with strong resistance at 49,525 & 16, 270 respectively. A daily close below the support of 46, 943 and 15,225 could trigger a sharper correction in the near term."