Why some midcap, smallcap stocks are coming under strong selling pressure

Market


Even though the Sensex and Nifty were steady today, the broader markets were under strong selling pressure. The stocks which had run-up sharply over the past few days were saw deep corrections. Some analysts said that traders in the broader market are likely to face stormy weather in the coming days. 

“After the 1000 point rally in Nifty in ten trading sessions the market is showing signs of high volatility in the days ahead. There is excessive speculation in certain stocks, particularly in the broader market, which have taken some stocks to unjustifiable levels of valuations. PEs in some cases are 100, 150 and even above 200,” says VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

“The high level of speculative froth in many stocks is evident from the abnormal trading volumes and huge volatility in these stocks. For instance, IRCTC had trading volume of 9083 crore yesterday and a price correction of around 15% from the peak. Many broader market stocks witnessed corrections of above 5%,” he said.  

Massive selling ( 2578 crore yesterday) by DIIs, he said, “indicates that smart money regards markets as overvalued and overheated.” 

The market direction, he said, will depend on whether the exuberant retail investors will again rush in to absorb the selling by institutions.

“At the present juncture, safety is in high-quality large-caps. The fact that high-quality stocks like HDFC twins, RIL, Infosys, L&T, Kotak Bank and some others were resilient during the crash in the broader market indicates the zone of safety for investors,” said VK Vijayakumar.

For example, IRCTC shares continued to decline today as the stock plunged over 15%, after suffering a sharp selloff towards the closing of Wednesday’s session. The scrip had hit a record high of 6,393 per share in Tuesday’s early session. Similarly, IEX shares are down nearly 18% from Wednesday’s intraday high. 

Santosh Meena, Head of Research, Swastika Investmart, said “there is a sharp correction in the stocks which were top performers in last few days” amid  valuation concerns. “It was easy to make money for the traders every day so we are seeing a technical correction to take out weak hands,” he said. 

“The market is not charitable enough to make you easy money for a long time, therefore, there is a risk of a short-term correction in the market to take out weak hands and that correction could be sharp especially in individual stocks,” he added.

However, Sneha Poddar, AVP Research, Broking & Distribution, Motilal Oswal Financial Services, said “if we remove some of the very expensive names, then this correction do offer bottom up opportunities, given the more relaxations being offered and pick-up in economic activities, buoyant festive mood and an improved demand backdrop. 

“The balance sheets and cash flows continue to improve as corporates tightened costs and deleverage. Going ahead, Q2FY22 earnings delivery vs earnings expectation would provide further direction to the market,” she added.

 

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