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Against this backdrop, JM Financial has warned that the long-running outperformance of midcaps and smallcaps could be losing steam, opening the door for largecaps to regain market leadership. In its report 'The Great Rotation: Is the Mid & Smallcap Leadership Cycle Nearing an Inflection Point?', the brokerage points to weakening market breadth and early signs of a recovery in largecaps’ relative strength. While oversold conditions could spark a short-term rebound, it is still too early to say whether this marks a lasting shift in market leadership. Is the midcap leadership cycle losing steam? JM Financial's analysis of the Nifty-to-Nifty Midcap 100 ratio suggests that the prolonged phase of midcap outperformance may be approaching an inflection point. The ratio has been in a persistent downtrend since 2021 and currently stands at around 0.40, near the lower end of its long-term range. Its decline reflects the significant outperformance of midcaps over largecaps during this period. However, the brokerage has identified early signs that the trend could be losing momentum. The ratio has made fresh lows even as its momentum indicator has formed higher lows, suggesting that the downward momentum may be weakening. The relative strength index (RSI) has also rebounded from the 20–25 zone and moved above its moving average, indicating an improvement in relative momentum after a prolonged period of weakness. ALSO READ: Sensex plunges 1,200 pts from day's high, Nifty below 22,400. 4 factors behind Rs 10 lakh crore wipeout JM Financial said the ratio appears to be forming a base near its recent lows, raising the possibility that the relative performance gap between largecaps and midcaps could be entering a consolidation or reversal phase. However, the ratio remains below its key moving averages. A sustained move above these averages, followed by a higher high, would provide stronger confirmation of a structural rotation towards largecaps, the brokerage said. Largecaps show early signs of relative-strength recovery A similar pattern is emerging in the relative performance of largecaps against midcaps and smallcaps. According to JM Financial, the largecap-to-midcap-and-smallcap ratio has remained in a sustained downtrend since 2020 and currently stands at around 1.20, near the lower end of its historical range. The monthly chart shows a triple-bottom formation in the ratio, while its momentum indicator has formed progressively higher lows. The RSI has repeatedly found support in the 25–30 zone and has now rebounded towards 38. The brokerage views this as a potential bullish divergence, suggesting that the relative underperformance of largecaps may be losing momentum. The latest rebound in the ratio, combined with improving momentum, points to the possibility of an early recovery in largecaps' relative strength. However, the ratio remains below its key moving averages. A sustained move above the short-term moving average, followed by a crossover above the longer-term average, would provide stronger confirmation of a structural rotation. If the reversal gains traction, JM Financial expects market leadership to gradually broaden towards largecaps, quality leaders and sectors with stronger institutional participation. Midcap and smallcap breadth approaches stressed levels The report highlights a sharp deterioration in market breadth across the midcap and smallcap segments, indicating that the weakness extends well beyond a handful of stocks. Only around 16% of Smallcap 250 constituents are trading above their 50-DMA, while approximately 40% remain above their 200-day moving averages (200-DMA). JM Financial noted that the proportion of smallcap stocks above their 50-DMA is approaching the historical stress zone of 10–20%, where tactical rebounds have often become possible. Midcap breadth is similarly weak. Only around 15% of Nifty Midcap 100 constituents are trading above their 50-DMA, while the proportion above their 200-DMA has fallen to approximately 28%. The brokerage said both indicators are approaching historically depressed levels, pointing to deepening weakness across the broader market. The simultaneous deterioration in short- and long-term breadth highlights the extent of internal weakness, even where index levels may not fully reflect the damage across individual constituents. However, the report also flags the possibility of a sharp mean-reversion move if market participation begins to recover. For investors considering buying the dip, the key distinction is whether the market is oversold and beginning to stabilise or whether weakness is continuing to spread. JM Financial identifies a reversal in breadth as an important early signal of a potential recovery. “The next signal to watch is not further deterioration, but a synchronized reversal in the percentage of stocks above their 50-DMA,” the report said. Weakness spreads across the broader market The deterioration is also evident in the combined Mid & Smallcap 400 universe, underscoring the extent of weakness beyond the headline midcap and smallcap indices. According to JM Financial, only around 15% of Mid & Smallcap 400 stocks are trading above their 50-DMA, while approximately 36% remain above their 200-DMA. The figures indicate substantial deterioration in short-term market breadth, alongside meaningful damage to longer-term trends. However, the latter measure is not yet as depressed as the 50-DMA breadth reading. The brokerage said the simultaneous weakness in both measures points to broad-based selling pressure, while leaving room for a potential breadth-led recovery if market participation improves. Even the Nifty 50 is not immune The deterioration in market breadth extends beyond midcaps and smallcaps. JM Financial's analysis shows that largecaps have also experienced considerable internal weakness. Only around 24% of Nifty 50 constituents are trading above their 50-DMA, while approximately 22% remain above their 200-DMA. The brokerage said the weakness in largecap breadth indicates that the sell-off has become broad-based across market-capitalisation segments. However, a recent uptick in the proportion of Nifty 50 stocks trading above their 50-DMA points to initial signs of stabilisation. JM Financial said the next important signal would be a synchronised reversal in market breadth across largecaps, midcaps and smallcaps. Such a recovery would help establish whether the market is moving towards a broader rebound, although improving breadth alone would not confirm a sustained reversal in the prevailing trend. “The next signal to watch is not further deterioration, but a synchronized reversal in the percentage of stocks above their 50-DMA,” the report said. Nifty's 22,000 level holds the key JM Financial has identified key technical levels that could determine the Nifty's next move. The brokerage has placed the first support at 22,550 and the second at 21,180. On the upside, 23,200 is the breakout zone, while 22,000 is the breakdown level. The report also identifies the 200-week exponential moving average (200 WEMA) as an important long-term technical marker. According to JM Financial, previous breaks below the 200 WEMA have been followed by sharp short-term declines, although such phases have also presented opportunities for long-term wealth creation. The brokerage has outlined two scenarios depending on whether the Nifty holds above or falls below 22,000. “If markets don’t break 22,000; expect a largecap driven mean reversion rally.” “If markets do slip below 22,000; expect Nifty to test 20,500 in the next 3 months.” The 20,500 level is a conditional downside scenario outlined by the brokerage, not a certainty. JM Financial's broader message remains cautious on midcaps and smallcaps, even as the possibility of a mean-reversion rally emerges. “In any case, this is not the time to be Bullish in Midcaps & Smallcaps,” the report said. What should investors watch before buying the dip? JM Financial points to two key developments that could help investors assess whether market conditions are improving: a recovery in relative strength towards largecaps and a sustained reversal in market breadth. For midcap and smallcap stocks, the proportion of constituents trading above their 50-DMA and 200-DMA remains an important indicator of whether market participation is recovering. For largecaps, a sustained improvement in relative-strength ratios and a move above key moving averages would provide stronger confirmation of a potential shift in market leadership, the brokerage said. For investors, the distinction remains between a tactical rebound driven by oversold conditions and a durable recovery supported by improving breadth and relative strength. Until those signals strengthen, the report suggests caution towards midcaps and smallcaps rather than an indiscriminate approach to buying the dip. Disclosure: This article has been written by Kumar Gaurav, who is not a Sebi-registered Research Analyst or an Investment Adviser. Gaurav and their ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective Sebi-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2025, Share Market on Budget 2025 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .) 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