200-DMA divide widens: Large caps hold strength, small caps lose ground

India's Equity Markets Experience a Widening Divide

The Indian equity market is witnessing a stark contrast between large caps and broader segments, with the former continuing to attract investor confidence while the latter loses momentum.

Nifty 50 Remains Resilient

The Nifty 50 index remains a picture of resilience, backed by the strength of its constituents, with nearly 85 percent of stocks trading above their 200-day moving average.

Breadth Divergence Signals a Challenging Phase

• The Nifty 500 and BSE MidCap indices have only about half of their stocks trading above the 200-day moving average.
• The BSE SmallCap index is experiencing weakness, with more than 63 percent of stocks trading below their 200-DMA.

200-Day Moving Average: A Crucial Gauge of Market Trend and Sentiment

The 200-day moving average serves as a crucial gauge of market trend and sentiment, with stocks trading above this level often viewed as being in bullish territory.

Rotation into Large Caps

Analysts warn of a challenging phase for the market, with the current breadth divergence signaling a rotation into large caps.

Key Factors Driving the Rotation

• Investors are steering away from high-beta and riskier pockets.
• Expectations of near-term volatility are shaped partly by the outlook on Federal Reserve and RBI policy for 2026.
• The inflation trajectory is a key factor in determining the market's performance.

Nifty 50 Continues to Outperform

The Nifty 50 index has shown little sign of fatigue, hovering close to its lifetime high after rising 1.9 percent in November.

Performance Gap on a Year-to-Date Basis

• The Nifty has climbed nearly 11 percent in 2025.
• The BSE 500 has risen 6.7 percent in 2025.
• The BSE MidCap has gained 1.7 percent in 2025.
• The BSE SmallCap has declined 5.7 percent in 2025.

Buying Interest Continues to Gravitate Toward Large Caps

Independent analyst Deepak Jasani noted that buying interest continues to gravitate toward large caps and stronger midcaps offering better earnings visibility, corporate governance, and deeper liquidity.

Valuations Remain Elevated

Analysts caution that valuations across the Indian market remain elevated compared with pre-pandemic levels.

Roughly 36 Percent of NSE-500 Stocks Trade Above 50 Times Earnings

Valuation froth may have come off the top, but the market is still priced well above long-term norms, according to Equirus Securities.

Risk-Reward Balance Favors Large Caps

The risk–reward balance continues to favor large caps and quality compounders, whose valuations remain closer to historical ranges.