Over the last few weeks the market has had some shades of the post-May 2006 situation about it. While the Sensex has not collapsed significantly below its January lows, mid- and small-caps continue their bottomless slide. In fact, the underperformance of the broader market is getting even more acute with every passing day.
The Sensex is becoming a bit irrelevant again as individual portfolios are shrinking every day, just as they did after the May 2006 sell-off.
In March, the Sensex has slipped 14 per cent but the BSE small-cap index is down 28 per cent and the Nifty Junior 24 per cent. The advances-declines ratio has been negative on 12 of the 14 trading days of March. The pain is particularly intense in the most liquid mid-cap names or the trading favourites. Stocks like Ispat, IFCI, JP Hydro and RNRL have slipped 65-70 per cent from their recent peaks and continue to fall further. This time, though, the stock futures positions cannot be blamed as there is hardly any overleverage. RNRL, which at the peak of the madness in January, ran a futures open interest of Rs 2,700 crore, is down to Rs 230 crore, Ispat down from Rs 700 crore to Rs 70 crore, Nagarjuna Fertilisers from Rs 350 crore to Rs 40 crore--or barely 10 per cent of their peak stock futures open positions. The derivatives flush-out has happened, yet these stocks are losing 5-7 per cent every other day. Then there are these odd stocks that are blowing up--the likes of Orchid or S Kumars, which just capitulate on account of some forced selling. Some of this mid-cap selling could be on account of unwinding of funded positions ahead of the March 31 deadline.
Large individual investors and operators could also be throwing in the towel on some of their favourites. This kind of breadth cannot be encouraging for market participants.
How many people own an HDFC, Bharti or TCS, after all? One can only hope that this large-cap buying continues and eventually mid-caps join in--however protracted their underperformance may be--after a while as they did in 2006. Maybe this is the last bit of capitulation for the broader end of the market, or maybe I am clutching at straws here.