End of the Midcap Era, Why Largecaps Are the Next Big Move

Author: Brijesh Bhatia (@bbrijesh9)
Pune, 28 January 2025: Timing the right stock trade at the right time is often hailed as the key to success in the stock market. But is timing everything?
While timing is crucial, understanding when to buy what is just as important. Many traders and investors often overlook this distinction. One of the most confusing decisions in stock trading involves knowing whether to focus on midcap stocks or large-cap stocks. Both segments have distinct cycles of outperformance and underperformance, and recognising these cycles can help traders maximise their returns.
The Role of the Ratio Chart
To decide between the two, traders often turn to ratio charts. A ratio chart compares the performance of one index or group of stocks against another. In our case, we are analysing the ratio chart of NiftyMidcap150/Nifty50, which compares the performance of midcap stocks against large-cap stocks in India.
Source: TradePoint, Definedge Securities
Looking at the ratio chart of NiftyMidcap150/Nifty50, some compelling signs suggest a shift in market dynamics.
Recently, we have observed the formation of a topping structure, which often signals the end of a bullish trend. The ratio chart shows a breakdown of rising and horizontal trend lines. This breakdown indicates that the period of outperformance by midcap stocks, as measured by the Nifty Midcap 150 index, is coming to an end.
But the analysis doesn’t stop there. Confirmation comes from the ratio chart’s movement relative to its short-term and medium-term moving averages, specifically the 50-day exponential moving average (50DEMA) and the 200-day exponential moving average (200DEMA). The ratio has convincingly breached both these key moving averages, which strongly suggests a reversal in the market trend. This signals that midcap stocks are unlikely to outperform large-cap stocks in the short term.
What Does This Mean for Investors?
The breakdown in the NiftyMidcap150/Nifty50 ratio and its slide below the 50DEMA and 200DEMA indicate that investors should shift their focus from midcaps to large caps. Essentially, this marks the transition from a period when midcaps had the edge over large caps to one where large caps are likely to lead the market.
This shift represents a more cautious approach to investing, as large-cap stocks tend to be more stable and less volatile than mid-cap stocks. The move towards large-caps is a sign of a more risk-averse environment, where investors prioritise safer, more reliable investments over higher-growth, riskier midcaps.
Why This Matters
Understanding when to move from one segment to another, especially from midcaps to large caps, can significantly impact an investor’s performance. Midcap stocks can offer high growth potential but also have higher volatility and risk. On the other hand, large-cap stocks offer stability, a track record of consistent performance, and more liquidity.
Thus, the message is clear – Goodbye Midcaps, Welcome Largecaps. Investors should now adjust their portfolios accordingly, focusing on large-cap stocks that are better positioned to weather any market uncertainties ahead.
Before we conclude, it is key to remember that though large caps are displaying relative strength compared to midcaps, one needs to ensure that the large cap stocks are in an uptrend before committing funds.
Disclaimer: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. This article is strictly for educative purposes only.
As per SEBI guidelines, the writer and his dependents may or may not hold the stocks/commodities/cryptos/any other assets discussed here. However, clients of Definedge may or may not own these securities.
About Writer:
Brijesh Bhatia has over 18 years of experience as a trader and technical analyst in India’s financial markets. He is a well-known face in the business channel as a Market Expert and has worked with broking giants like UTI, Asit C Mehta, and Edelweiss Securities. He is currently a Senior Research Analyst and Editor at Definedge.