December 22, 2017

Nooreshtech: How long can divergence between small caps and large caps continue?

BSE Indices are not tracked as much and we find BSE Smallcap as the best indicator for looking at froth/momentum in the markets.

The reason to look at it is because it has the lowest of the smallcaps and is not limited by no of stocks like Nifty Small 100. As of now the index has 849 Stocks !!

The S&P BSE SmallCap is designed to represent the bottom 15% of the total market cap of the S&P BSE AllCap. The index is designed to represent the small-cap segment of India's stock market.

We have been looking for divergence in BSE Smallcap Index move with the benchnmark – Nifty/Sensex for finding times to get strict with our stoplosses as well as ride momentum.

What is the Divergence we look for.

1) Momentum Divergence of BSE smallcap with Nifty/Sensex

When Nifty makes lower tops or is struggling to make strong moves and BSE Smallcap Indices continue to make higher highs or much stronger moves.

After this we generally see a good correction of 10-25% on smallcaps and 5-15% on the benchmark. The tough part is this divergence can stick for a couple of months also. So the strategy is to ride with strict stoplosses but start avoiding leverage. Not the best time to put fresh money and if you are a conservative trader/investor keep increasinhigh g cash in small parts.

2) Panic Divergence of BSE Smallcap with Nifty/Sensex


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