Gearing up for more! Why rally in midcaps and smallcaps will continue

Last year, I told you that Smallcaps can bring bigger profits in 2023. While the broader index Nifty50 has rallied 6.34% in 2023, the Nifty Midcap 100 has surged 24.15%. The Nifty Smallcap 100 has outperformed both the indices, boasting an impressive 25.82% return.

We had mentioned about how the Nifty Smallcap 100 Index would rebound next year after falling in a calendar year. There have been only five instances since 2005 where the Nifty Smallcap 100 has given a negative return. However, in the following year, the index yielded a return of above 30% barring a single instance in 2019.

The chart below shows the yearly returns of the Nifty Small Cap 100 index. In 2022, the Smallcap index fell 11% and notably, the year 2023 has witnessed a remarkable resurgence, with the index rising by more than 25% in just 8 months.


After a relentless streak of advancement spanning 5 consecutive months, the Nifty50 index cooled off in August 2023. In contrast, both the Nifty Midcap 100 Index and the Nifty Smallcap 100 Index have stayed buoyant, making record highs with each passing day.

So where are the markets headed? Will the rally continue? Will Nifty continue its uptrend? Do smallcaps have room to outperform?

Let’s do some data-crunching.

The Nifty50 index rallied continuously for five months from March’23 to July’23. Since 2010, there have been only four instances where the index has rallied continuously for five or more months.

As shown in the table below, the Nifty50 has yielded double-digit returns in all of these periods with the average return being 23.08%. In the next six months, the broader index enters a consolidation phase giving modest returns of 0.58%.


Let us see how the Nifty Midcap 100 Index and the Nifty Smallcap 100 Index return during the same period.


The Nifty Midcap 100 Index and Nifty Smallcap 100 Index have always outperformed the Nifty50 index surging on an average by 30.50% and 30.80% respectively. However, unlike the Nifty50 index which enters a consolidation phase, the Nifty Midcap 100 and Nifty Smallcap 100 indices continue their upward rally, soaring 6.30% and 8.10% in the next six months.

This time again, the Nifty50 index has rallied for five continuous months, with the Nifty Midcap 100 and Nifty Smallcap 100 indices outperforming the broader index. In August’23, the Nifty50 yielded a negative return of 2.53% while the Midcap and Smallcap continued to soar by 3.70% and 4.62%, respectively.

Drawing comparisons, it seems that the Nifty Midcap 100 and Smallcap 100 would continue their trajectory of upward movement.

Therefore, this is still a favourable time for investors to invest in small and midcap stocks. However, investors should exercise due diligence in scrutinizing not only financial metrics, but also the governance structures, board composition, and disclosure practices. This holistic evaluation would enable investors to safeguard their capital and optimize their portfolio returns.

Technical Analysis:


The Nifty50 consolidated in the 19,250-19,450 range throughout the week and closed at 19,435, up 170 points. Following five consecutive weeks of closing in the red, the Nifty index concluded the most recent week with a positive gain, closing in the green.

The volatility cooled off the current week as India VIX ended the week 5.94% lower at 11.36, giving minor comfort to the bulls. The Foreign Portfolio Investors (FPIs) showed promising signs of bulls coming back as the Long-Short Ratio moved from 40.42% on 25th August to 50.50% on 31st August, indicating that the FPIs now marginally hold more long positions relative to short positions in Index Futures.

Nifty tested the 50-day Exponential Moving Average of 19,295 on the daily chart six times in the last fourteen trading sessions and managed to close above it on Friday. The Index has given a higher close and formed a morning star pattern on the daily chart, which is considered to be a bullish reversal signal. The maximum call open interest for Nifty is placed at 19,500 Strike. Short covering at 19,500 Strike with a follow-up move from Friday’s closing of 19,435 will lead to the bulls coming back in Nifty. On the downside, the level of 19,300 will act as a strong support and a breach of the same can drag the Index to 18,900 levels, where its next visible support is placed.