Small- and midcaps shine as blue-chip stocks struggle for momentum
Mid- and small-cap stocks have continued to defy index-level inertia amid a rush in primary-market listings. The average advance-to-decline (A/D) ratio – a widely watched indicator of overall market health – in August is up for the fifth consecutive month, its longest winning streak in more than two and a half years, pointing to significant investor interest beyond the typical frontbenchers that populate the two broadest gauges on the two competing exchanges.
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The average advance-to-decline ratio, a measure of the number of stocks rising versus those falling, stood at 1.07 so far in August, its highest level in four months. It has remained above 1 for five consecutive months, indicating that more stocks have advanced than declined. “This shows more stocks are rising than falling even though IT, FMCG and metals have not participated meaningfully,” said Manish Bhandari, CEO and Portfolio Manager at Vallum Capital.
The last time the A/D ratio showed similar strength for a longer stretch was between April 2023 and January 2024, when the ratio remained above one for 10 consecutive months.
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A rising ratio indicates that buying is across a larger number of stocks, signalling strong market breadth. A falling ratio suggests gains are becoming concentrated in fewer stocks or that selling is becoming more widespread.
Retail investors’ appetite for mid- and small-cap stocks has kept this measure higher with equity schemes betting on these share segments getting a bulk of the flows in recent months.
In August, mid- and small-cap schemes received Rs 13,960 crore or 56% of the total equity flows, compared with Rs 11,692 crore, or 40% of the flows in the previous month. In contrast, large cap funds saw outflows of Rs 1,322 crore, their first outflow in 30 months, pointing to the lack of appetite for blue-chips in general.
The divergence between the key indices and the broader market is also visible in their performance. Since April, the Sensex and Nifty have gained 8% and 9%, respectively, while the Nifty Midcap 100 and Nifty Smallcap 100 have jumped 22% and 31%, respectively. The Nifty 500 has gained 15% during the period.
“The explanation is increasingly bottom-up: June-quarter profit growth for Nifty 50 companies reached 18%, the highest in 10 quarters, while 19 sectors beat earnings expectations and the upgrade-to-downgrade ratio improved to 1.5,” Bhandari said.
Experts said the divergence suggests that participation has been broader across the market, with investors finding value beyond the largest stocks. This includes stocks that became cheaper after earlier declines as well as growth stocks available at a discount to their potential returns.
