[Premium] Small and Mid-Caps Hammered, Now What?

The theme of small-cap weakness continues, with the Nifty Free Float Smallcap 100 falling roughly 23% from its August highs, but we're now at our downside price target of 6,100 and prices are over 30% below the 200-day moving average. With the index itself and many of our trade ideas on the short side outlined last month meeting their downside price targets, there's little reason to be initiating or adding to shorts at current levels.

Mid-caps fell roughly 17% from its August highs, with the index now sitting between our risk management level of 17,750 and our downside target of 16,030. While we're not at our downside target just yet, the reward/risk in the index and individual stocks is less skewed in our favor than it was a month ago.

The Nifty 50 on the other hand, continues to show relative strength by retracing only 8% from its August highs with momentum not getting oversold. We've been focusing on the long side of large-caps, so we want to be using this pullback to be identifying the names that are holding up well and that should lead if/when the index rebounds.

The Bottom Line: After the sharp decline in small and mid-caps over the last month, there's little reason to be shorting at current levels. Instead, we want to be either looking for mean reversion opportunities on the long side, or selling the weakest stocks into strength. The overall strength or weakness we see during the market's bounce will provide us with the necessary information to determine where the next best intermediate-term reward/risk opportunities will be.

For now though, it appears that erring on the long side of large-caps and playing a bounce in small and mid-cap names that have been showing strength is best. At some point we'll likely get back to fading strength in the weakest areas of the small and mid-cap space when the reward/risk is more favorable. If/when that time comes, I'll be sure to do a post letting you know which stocks look best to express that thesis.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team