The sharp single-session fall in small-caps and mid-caps raised quite an alarm. Seasoned investors are wondering if this dip will get bought like every previous dip. The persistent buying of every dip that we saw through 2025 may not extend into 2026. And the reasons are somewhat unusual.
The sharp rally in precious metals has actually shifted the entire FOMO crowd into buying ETFs of silver and gold. They seem to be in a mood to simply abandon their fear of missing out on small-cap and mid-cap stocks. This has led to an almost one-sided selling in several companies, with buyers simply not showing up.
A dearth of buying interest inevitably leads to higher impact costs while selling. Clearly, the net asset values of small-cap mutual funds are declining at a rate that can change investor mood in this space.
This is something nobody is prepared for. In recent times, the broad assumption has been that flows will remain strong and dips will get bought into. This is changing, and the market could turn very fast. The lack of liquidity in trading has the capacity to significantly raise the risks in the small-cap space. With flows also likely to play spoilsport, the space looks most vulnerable right now.
The coming days will see a buyer’s market emerge in microcaps and smallcaps as consensus turns negative and the public mood becomes restless. The budget can be a make-or-break event for small caps, and the market can become more reactive than necessary if it does not get confidence from the Union Budget. The coming week is the most crucial week for investors. It must restore public confidence that was badly shaken last week. The markets remain edgy, not knowing what to do in equities.
