The lesson from market history is that frothy valuations are unsustainable. Therefore, the blood bath in the broader market which happened yesterday is hardly surprising to sane minds in the industry.
Investors should appreciate the following facts.
The Nifty Smallcap index is down 13.5% and the midcap index is down 6.8% from their respective peaks. But Nifty is stable with a minor cut of only 2.1%.
There is room for the broader market to correct more since the valuations continue to be elevated.
Investors should now focus on largecaps and quality midcaps. The turbulence in the market will give cherry picking opportunities.
From now on irrational exuberance will take a back seat and rational valuations and quality will be the driving force. This turbulence will separate the men from the boys. High quality private sector banks and the leading names in capital goods, telecom and autos can be accumulated in a calibrated manner.
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