[Chart of The Week] Cap-Segment Divergence Continues

JC Parets
August 1, 2019

Today we're looking at a chart that highlights a major divergence that's plagued the Indian stock market since January 2018.

We've spoken about this topic in the past, but keep drilling it home every few months because it remains one of the key reasons why Indian Equities as an asset class are struggling.

Below is an Equally-Weighted Index of the 10 largest Nifty 500 stocks overlayed with the Nifty Free Float Small-Cap 100...and the divergence is massive. While our custom index of Large-Cap stocks is up roughly 25% from its January 2018 highs, Nifty Small-Caps are down 31%.

Click on chart to enlarge view.

While this divergence has existed at other times in history, it's never been as large as it is today. This paints a damning picture for risk appetite.

If market participants were optimistic about Equities they'd be buying riskier Small and Mid-Cap stocks, but that's not what this chart shows.

For the last 18 months, market participants have been "hiding out" in the Large-Cap names because while they need to put money to work, they want to be buying larger, more established companies that are likely to hold up better during weak market environments.

Since October we've seen Mid and Small-Caps try to stabilize and create bases from which they could reverse to the upside. In past instances of this divergence we've seen Small-Caps "catch up" to their Larger-Cap peers and make new highs together, but this time we're seeing the opposite.

The bases we saw form in Small and Mid-Caps have now failed miserably as these indexes are making new lows. Meanwhile, the Large-Cap Nifty 50 and Nifty 100 are breaking down as well.

In addition to their breakdowns on an absolute basis, we're also seeing them break down relative to the rest of Emerging Markets. Not good.

The bottom line is that until we see Small and Mid-Caps stabilize, Indian Equities as an asset class are going to continue struggling.

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

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Allstarcharts Team

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