Small-caps could power the market rally in coming days

There are reasons to feel that Small-caps may outperform. Historically, small stocks have suffered greater losses during downturns, and that has happened this time too. However, when markets rebound, smaller stocks also tend to see a sharper rise, and that could be happening now as well.

The small-caps have similar valuations in terms of PE but lower PBV and higher dividend yields. The dividend is actually significant at the moment due to low interest rates. The mid-caps are at an extraordinarily rich valuation of PE 53x, although the PBV and dividend yields are better than the Nifty. While investors will look at company-specific ratios, anybody seeking value will probably focus more on the small-caps segment.

In terms of purely technical indicators, all three indices are strongly bullish and trending up. They are running well above their respective 200-day moving averages. That’s usually the signal of a healthy bull-market trend. They are also above their respective 50-day and 20-day averages which means the short-term and medium-term trends are also bullish. When a strong trend like this is established, it can continue indefinitely, and while big stocks will do well as the trend lasts, investors focusing on smaller stocks could get even higher returns.