The relative weakness of the Nifty Free Float Smallcap 100 has been a theme all throughout 2018, so with today's chart of the week, I want to take a look at what that potentially means for the broader market.
Below is a chart of the Nifty Free Flat Smallcap 100 relative to the Nifty 100, overlaid with the Nifty 500. During market uptrends, we want to see small caps outperforming large caps, as that is evidence of risk appetite among market participants as opposed to risk aversion.
In 2013, we saw this ratio make a lower high as the broader market made a higher high, signaling a divergence that ultimately resolved itself by the downward trend in small-cap performance accelerating and the market being dragged with it. Eventually, they both bottomed together and went on to new highs. A corrective period also occurred throughout 2014 to 2016 until both the ratio and the Nifty 500 made new highs in September through October of 2016.
Today, we're seeing a similar situation in that small-cap performance is falling off a cliff after making a new high with the broader market in January. Although the Nifty 500 has been correcting through time, rather than price, the historically positive correlation between them suggests it's unlikely that the Nifty 500 will be able to stage any sort of sustainable move to new highs until this ratio bottoms.
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