Why Investors Should Be Cautious in Extended Bull Runs Like This

In my previous article, I wrote how the Nifty 50 index often returns to its mean after an extended bull run. It’s much like a stretched rubber band that eventually snaps back. If we apply the same concept to the Nifty Smallcap 100 index, we can see similar patterns. Even though the small-cap stocks are highly volatile, they gravitate towards their mean over time.

In the Nifty Smallcap 100 chart below, we can see that the index has retraced to its 200-day moving average line five times since 2016. After each bull run, the index pulls back to this key support level or consolidates near it before resuming its upward trend. This highlights the significance of mean reversion in identifying market trends, especially during extended bullish phases.

Small caps have gained attention during the bull market over the past year, but investors should understand the concept of mean reversion. This helps them remain cautious, identify opportunities, and maintain a balanced approach to risk and reward, aiding in better decision-making during market pullbacks.

The chart below highlights the Nifty Smallcap 100 index’s streak of closing above its 200-day moving average (DMA). Between 2004 and 2024, the index has managed to close above this level for over 100 consecutive days on nine occasions whereas it has recorded a streak of over 200 days in seven instances.


The table below showcases the longest streaks of the Nifty Smallcap 100 index staying above 200-day moving average for over 100 days, and the returns delivered by the index during these periods. The longest streak occurred between 2004 and 2006, lasting 411 days with a 120.94% return. The ongoing streak since April 2023 has already extended to 344 days, yielding a return of 103.39%.

The forward return analysis in the table reveals that while the Nifty Smallcap 100 index has posted impressive gains during extended bullish phases—ranging from 7.49% to 120.94%—it is often followed by short-term corrections. This is reflected in the negative average returns over 1- and 3-month periods.

Just as a rubber band snaps back with greater intensity when stretched, small-cap stocks, known for their high volatility, tend to experience sharp declines after prolonged upward trends. Furthermore, the negative returns shown are calculated from the point where the index closes below its 200-day moving average, meaning the pullback from the peak to the 200-DMA level is in addition to the corrections listed in the table.


The chart below compares the performance of three indices: Nifty Smallcap 100, Nifty Midcap 100, and Nifty 50, over a period from 2010 to 2024. Small-cap and mid-cap stocks, being more growth-oriented tend to outperform the large-cap stocks represented by the Nifty 50 during bullish phases, as seen in the chart. This often results in a significant gap between the performance of these indices compared to the Nifty 50. Eventually, these indices tend to converge due to mean reversion. In essence, when the market corrects or stabilizes, midcap and smallcap stocks often undergo sharper corrections, bringing their performance closer to that of large-cap stocks.


Considering the above points revolving around mean reversion, investors should remain cautious in expecting consistent short-term gains post a bull run. They need to adopt a balanced approach, recognizing the risks of post-streak corrections and making informed decisions to navigate through the potential volatility that lies ahead.

Technical Outlook:


Nifty touched a new all-time high of 25,433 and ended the week at 25,356, up 2.03%. Historically, September has been a fragile month, with the first two weeks typically bullish and the latter half turning bearish.

On the weekly chart, Nifty formed a bullish engulfing pattern, and the daily chart shows a higher-high and higher-low formation. However, the domestic market may track global cues in the coming week. Nifty is well-positioned above the 20 DMA, signaling overall strength. Any short-term correction toward 25,150 could present a buying opportunity.

India VIX, currently at 12.55, is at its lowest level and could reverse in the coming week, potentially challenging the bullish sentiment. Sector rotation may also influence short-term market movements. Nifty's support is placed around 25,100, followed by 25,000, while resistance is seen at 25,520, followed by 25,650.