How does the small-cap index respond to a sudden and substantial one-day decline? An interesting dataset to ponder

On September 12th, an unforeseen disruption rattled the financial markets, leading to a rapid and unexpected drop in the broader indices, akin to a house of cards collapsing. The Nifty Small-cap index, in particular, witnessed a remarkable 4% decline. While investors typically handle gradual shifts in market trends more comfortably, abrupt and unanticipated changes like the one witnessed on September 12th can be profoundly unsettling. In this analysis, we will delve into what could unfold over the next few weeks for the Nifty Small-cap index.

A similar level of decline, or possibly even more severe, was last seen nearly nine months ago in December 2022. Let’s now explore what usually follows such abrupt market plunges within a day. We will examine the returns observed in the ensuing 10 and 30-day periods, drawing upon historical data.

Considering that the markets reached their lowest point in March 2020 and have since experienced a bullish trend, we have compiled data from instances within this bullish period where the Nifty Small-cap index suffered a decline equal to or greater than 4%:

From the data presented above, it becomes apparent that during this bullish phase, there have been numerous occurrences of substantial one-day declines. Nevertheless, the subsequent outcomes should bring optimism to market participants, as in most cases, the index yielded positive returns in the subsequent 10 and 30-day periods. There is only one exception, where the index reported a negative return in the 30 days following the decline on January 24, 2022.

Therefore, the probability suggests that such significant one-day declines during a bullish phase offer favourable opportunities for investors to enter the market.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.