Key ratio hits 15-year low, signals small-cap rally may pause soon
market indicator is suggesting that the rally in small-cap stocks since March might be nearing its end. The Sensex to BSE Small-cap index ratio has plunged to a 15-year low of 1.7, last seen at the peak of the rally in smaller shares in 2018.
Small-cap stocks have underperformed blue chips whenever the ratio hits these levels. The rebound in equities in 2010 following the Global Financial Crisis had also led to the ratio falling to these levels.
«When the Sensex to BSE Smallcap index ratio decreases, it indicates that Sensex stocks are poised to outperform in the short term,» said Apurva Sheth, head of market research at Samco Securities.
«Conversely, small-cap stocks are expected to outperform when the ratio rises.»
With the ratio at a 15-year low, small-cap stocks have limited potential to outperform, he said.
In January 2018, the Sensex to Smallcap index ratio fell to a low of 1.73 after a rally of 30% in the small-cap index and 11% in Sensex. In the following six months, the Smallcap index fell 15% while Sensex gained 4%.
In September 2010, the Sensex to Small-cap index ratio reached a low of 1.8. Over the next six months, the Smallcap index declined 22%, whereas the Sensex gained 2%.
Small-cap stocks had surged by 20% in the preceding six months, while the Sensex had seen a 10% increase.
Since March 1, the small-cap index has jumped of 33%, while BSE Midcap and Sensex gained 27% and 9%, respectively.
Shah said this ratio follows a cyclical pattern.
During the so-called safe mode, characterised by an increase in the ratio, blue chip stocks that form the Sensex tend to outperform small-cap stocks. Conversely, in the risk mode, when the ratio declines, small-cap stocks are expected to outperform large-cap stocks.
