The market is still in a range. Despite Friday's spectacular pullback, the bulls could not effect a breakout, convincingly. Instead, the weakness in global markets brought some red back on the screen. The large-caps are giving the impression of being tired. With high-octane liquidity drying up for the moment, valuation concerns are resurfacing: a few influential houses like Kotak have turned cautious in their recent strategy reports. This apparent sluggishness, coupled with global weakness, is providing the bears a bit of a peek into the game, after being completely shut out for the last couple of months.
What is interesting, though, is that even as index stocks give back some of their recent heady gains, the action is spreading to the broader universe outside the Nifty. During the Sensex’s journey from 17,000 to 20,000 the market had turned quite narrow, with only a handful of stocks generating most of the returns. Either you were in the stocks that were moving or your portfolio would not have reflected the shine of the Sensex. This had widened the valuation gap between some of the index heavies and non-index large-caps and mid-caps that had delivered good results. It is in the fitness of things then that, as the momentum in the large-caps tires out a bit, the mantle of outperformance shifts to the mid-cap universe. This shift comes, interestingly, at a juncture when the general expectation is that foreign portfolio flows will moderate in the next couple of months on account of the P-Note adjustments, further robbing large-caps of additional fuel.
It is a retail playfield now and retail loves mid-caps. Investors should not be too unhappy if mid-caps continue their run in November even if the Nifty were to spend some time in a range.
Past experience, however, suggests that while such mid-cap outperformance could sustain in a phase of the index being ranged, the pattern breaks down in the event of a sharp large-cap sell-off. That should not happen. As long as large-caps remain in a 10 per cent kind of trading range the interest in mid-caps could remain high. Anything more and the heavy outstanding positions in stock futures could start to come under pressure. It is difficult to say what the market will do next. Monday's slide notwithstanding, the picture is hardly conclusive. While tiredness is visible, jumping to conclusions has proved to be hazardous in the past. It is good that there is some consolidation, let us just wait and see what shape it takes from here.