Small-Cap Stocks Are Surging Again. Should Investors Trust This Rally?

Something quite startling has emerged in the market in recent weeks. Even as the war in Iran continues to swing between ceasefire and renewed tensions, even as Trump's statements keep blowing hot and cold, and even as we went through some local elections, the market has held steady.

Rising from the lows of March 30, the Nifty has gained about 14% in a month - a decent-sized return, one could say. But that is not the main event. What has really startled the market is the solid and consistent rise of the Nifty SmallCap 100 index during the same period — a 25% gain.

And just look at the trajectory. Not a single day where the previous day's low, or even a swing low, has been broken. This kind of movement is usually seen when there is aggressive fresh buying in the market. And the mood has visibly shifted to positive — especially as portfolio values recover.

Where has this firepower come from? The obvious answer is DIIs and retail investors, because FIIs are still on a selling spree (more than $20 billion sold in the first four months of this year). With DIIs absorbing that entire selling pressure, resulting in a higher-bottom formation compared with the deep gash back in March 2025, the stage seemed set for a corrective rally.

Have the quarterly results provided the ammunition? Not really. It seems more like expectations, and perhaps a lot of FOMO mixed with fresh money. After all, March saw the markets fall by more than 10% on geopolitical tensions. Could that have created the spring action? Perhaps. But if this is the reason, then is the rise justified? After all, the Q4 results factored in just one month of war-induced damage. The bigger impact may still be to come.

If that is the case, then we should watch for technical signals that the rally is fizzling out. Fundamentally, crude prices and currency movements will continue to be the main factors influencing the market. But those are macro factors and, therefore, cannot really be used to time the market.

There are other factors to consider when looking at small- and micro-cap stocks. I am using these categories because most retail investor portfolios are made up of stocks from this space, and even smaller market-cap stocks. For reference, the Microcap index lists stocks ranked between 501 and 750 by market capitalisation. Chart 2 shows this index in monthly format. Its moves are almost identical to those of the Nifty Smallcap 100 shown earlier.

While there is little doubt that stocks within these indices may have done reasonably well in this rally, the real question is how stocks below the Rs 2,000 crore market-cap level have fared. The indices corrected by around 29% from their all-time highs, but stocks in the smaller market-cap segment lost as much as 60-65% of their value, with many recording fresh all-time lows in March 2026.

So, while the rally may be lifting sentiment, we should examine the momentum health of the move.

This is shown in Chart 3, where the Microcap index is annotated with RSI, MACD and DMI.

That picture looks less bullish, as all the oscillators remain stuck in bearish or neutral territory. This reveals that, despite the strong rally, smaller-cap stocks may not yet have shaken off bearish momentum. One may argue that more than 800 small-cap stocks have risen over 20%, but that could simply reflect how deeply oversold many of them were. Hence, I would not want to read too much into that data just yet.

Even when checking the same indicators on weekly charts, the picture improves only marginally. That is not encouraging enough to justify chasing stocks at higher levels in the current market. Pullbacks are inevitable, and those can then be used to enter stocks at more favourable prices.

Therefore, Q4 results and the associated commentary should probably provide the best pointers for prospecting. After filtering stocks through those parameters first, we can then look at their individual charts to rank them by market strength and make selections. While doing this, one may also pay attention to sectoral moves emerging within the stock lists. For example, many metal stocks have shown brisk price action, as have several from the power sector. The results season still has a couple of weeks to run before earnings season concludes, so there is no major hurry here.

This does not mean those stocks have turned bullish - only that they may be worth keeping on the radar for the coming months.

Conclusion

Typically, large moves after a corrective pattern begins to show signs of completion signal that something new may be underway. That seems to be the case here, at least as far as small-cap and micro-cap indices are concerned. These include stocks ranked between 251 and 750 by market capitalisation. While that is already a large universe, we must remember there is another vast pool of decent stocks beyond rank 750 that the indices do not cover. There are no ready-made public reference points for these stocks. So, if one wants to identify potential winners - and there will surely be many - from the broad universe beyond market-cap rank 501, a lot of hard work will be required.

The moves in these indices suggest that something different is unfolding in the market right now, given how substantial the outperformance versus the Nifty has been. Several sentiment indicators at the March 2026 bottom suggested that a durable bottom may have formed and that a meaningful rally could emerge from there.

A small framework for approaching that research has been outlined above. There may be several other ways to tackle the problem, but it must be recognised that without putting in the effort, spotting the winners may prove difficult. Remember also that, in the current market, technology through stock screeners - both fundamental and technical - is being deployed extensively. Once a fundamentally strong stock is identified, money waiting on the sidelines moves swiftly. If the stock has institutional pedigree, the chase becomes even more intense. These days, there are so many indices that almost every stock belongs to one index or another.

Therefore, alongside solid research, there is also a need for quick action. Keep the gunpowder dry.

Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.

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