Red flags going up on excessive valuations of small cap stocks

There are signs of exhaustion in the market rally, particularly in the broader market, according to V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services. Higher valuations are limiting the bulls, with no major positive triggers on the horizon to sustain the rally beyond a certain point.

Expectations of the Fed’s rate cuts and consensus on a reduction in the number of rate cuts this year may also restrict the rally in the US market, affecting the Indian market as well. Kotak Small Cap’s decision to impose restrictions on investments in their small cap fund, following Tata and Nippon small cap funds, serves as a warning regarding excessive valuations in the small cap segment.

Investors should consider shifting some of their funds to the safety of large caps, suggested Vijayakumar. Deepak Jasani, Head of Retail Research at HDFC Securities, noted that stocks in the Asia-Pacific region were trading lower in anticipation of remarks from Federal Reserve speakers, following a pullback in Wall Street from record highs.

On Monday, Nifty closed lower by 0.41% or 90.7 points at 22122.1, forming a small candle in a volatile trading session. The index may face resistance at 22249, with support likely at 21893-22050 in the near term. BSE Sensex is trading at 72,913.54 points, up by 123.41 points, with TCS, Powergrid, Titan, and HCL showing gains of over 1 per cent.