Small and mid cap stocks are coming under intense selling pressure with the regulator raising red flags.
The small cap index is down more than 3 per cent on Wednesday. The mid cap index is down more than 2 per cent. The SME IPO index is down more than 4 per cent.
Other pockets of the market are also very weak with the PSU index down more than 4 per cent.
Market breadth is extremely negative with 83 per cent of the listed stocks declining. More than 700 stocks have hit the lower circuit indicating the meltdown in the small cap stocks.
V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services said in the near-term investors should focus on the sustained weakness in the broader market, particularly the small cap segment. The excessive valuations in these segments driven by the irrational exuberance of retail investors have been a concern for many months now. But it has taken the strong message from the regulator SEBI to trigger a correction in the Nifty Small cap index by 10 per cent from the February 8 peak.
He said that 396 stocks are in the lower circuit indicating that there is more pain to come in this segment. Actions from mutual funds also indicate the excessive valuations in the broader market. ICICI Pru has joined two other leading funds in stopping lump sum investments in their mid and small cap schemes. More are likely to follow. The net impact of this shift would be more money flowing into large caps.
Deepak Jasani, Head of Retail Research, HDFC Securities said adverse breadth data is weighing on the minds of investors and traders.