[Free Chart of the Week] Smallcap Weakness a Red Flag?

Below is a chart of the Nifty Free Flat Smallcap 100 relative to the Nifty 100, overlayed with the Nifty 500. During market uptrends we want to see small-caps outperforming large-caps as it's evidence of risk appetite among market participants, as opposed to risk aversion.

In 2013 we saw this ratio make a lower high as the broader market made a higher high, signaling a divergence which ultimately resolved itself by the downward trend in small-cap performance accelerating and the market being dragged with it. Eventually they both bottomed together and went on to new highs. A corrective period also occurred throughout 2014-2016 until both the ratio and the Nifty 500 made new highs in Sept.-Oct. of 2016.

Today we're seeing a similar situation in that small-cap performance is falling off a cliff after making a new high with the broader market in January. Although the Nifty 500 has been correcting through time, rather than price, the historically positive correlation between them suggests it's unlikely that the Nifty 500 will be able to stage any sort of sustainable move to new highs until this ratio bottoms.

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Allstarcharts Team