Market Sell-Off Deepens Amid High Valuation Concerns and Global Uncertainty

The Indian equity markets witnessed a sharp correction in a holiday-shortened trading week, with broader indices underperforming the benchmark indices amid concerns over high valuations and continued foreign investor outflows.

During the week, the BSE Large-cap Index declined 3.4%, the BSE Mid-cap Index shed 4.4%, and the BSE Small-cap Index tumbled 6%. In February alone, the BSE Mid-cap and Small-cap indices lost 10.4% and 13.7%, respectively, while the Large-cap index dropped 6.5%.

The Nifty 50 fell 671.2 points or 2.94%, closing at 22,124.7, while the BSE Sensex declined 2,112.96 points or 2.80%, settling at 73,198.1. Over the course of February, both indices recorded a steep fall of over 5.5% each.

Sectoral Weakness Across the Board

All sectoral indices ended in the red, with some experiencing steep declines:

Nifty IT Index suffered the biggest loss, dropping 8%, as concerns over a weakening U.S. business environment led to fears of deal deferrals.
Nifty Media Index declined 7%, reflecting weak investor sentiment in entertainment and broadcasting stocks.
Nifty Realty Index lost 5.5%, amid worries about high valuations and a potential slowdown in demand.
Nifty PSU Bank Index shed 5.3%, as selling pressure persisted in public-sector banking stocks.
Nifty Energy Index fell 5%, weighed down by global crude oil price fluctuations and uncertainty over future energy policies.

Expert Take: Foreign Outflows and Global Headwinds Drag Market Sentiment

Vinod Nair, Head of Research at Geojit Financial Services, attributed the weak market performance to a combination of global uncertainties, foreign investor selling, and high valuations in the small- and mid-cap space.

“The Indian equity market closed the week on a significantly weaker note, as investor sentiment deteriorated due to escalating trade tariff concerns and unfavorable global cues. The IT sector faced the sharpest decline amid fears of a weakening U.S. business environment, leading to deal deferrals. Additionally, concerns over high valuations continued to weigh on small and mid-cap stocks. Meanwhile, declining U.S. bond yields signal a flight to safe-haven assets, while FII flows have shifted toward more affordable markets.”

Nair also pointed out that while India’s Q3 FY25 GDP data met expectations, with a slight upward revision to 6.5% for the fiscal year, investors are closely watching upcoming tariff policies, U.S. Core PCE Price Index, and jobless claims.

“In the near term, market conditions are expected to remain weak, with a gradual recovery anticipated as earnings improve from Q1 FY26 and global trade policy uncertainties subside.”

Small-Cap Carnage: Over 200 Stocks Record Double-Digit Declines

The BSE Small-cap index declined 6% this week, with over 200 stocks falling between 10% and 23%. Some of the worst-performing small-cap stocks included:

R R Kabel, Precision Camshafts, Swelect Energy Systems, Oriental Rail Infrastructure, KEI Industries, TBO Tek, Magellanic Cloud, Suratwwala Business Group, Sundaram-Clayton, Triveni Turbine, EPL, EKI Energy Services, Quick Heal Technologies, Lloyds Engineering Works, Sanghvi Movers, Paramount Communications, ASK Automotive, Salasar Techno Engineering, Reliance Infrastructure, Religare Enterprises, Kitex Garments, and Suraj Estate Developers, all of which fell between 15% and 23%.

Technical Analysis: Where is Nifty50 Headed?

Bearish Momentum Continues, Key Levels to Watch

Hrishikesh Yedve, AVP Technical and Derivatives Research at Asit C. Mehta Investment Intermediates, cautioned that as long as Nifty remains below 22,500, the bearish momentum is likely to persist.

“Nifty’s immediate support is around 22,000, followed by 21,850, where the 100-Weekly Simple Moving Average (100-WSMA) is placed. Traders are advised to follow a ‘sell on rise’ strategy until market sentiment improves.”

Rupak De, Senior Technical Analyst at LKP Securities, noted that Nifty experienced a sharp 400-point decline on Friday, breaking a key consolidation range. The Relative Strength Index (RSI) remains bearish but has entered oversold territory, indicating that a short-term pullback could be possible.

“In the near term, Nifty is expected to find support around 21,800-22,000. A sustained move above 21,800 could lead to a significant recovery, while failure to hold this level may trigger another sharp decline.”

Further Downside Possible as Bearish Pattern Forms

Nagaraj Shetti, Senior Technical Research Analyst at HDFC Securities, highlighted the formation of a long bearish candle on the daily chart, signaling a decisive downside breakout.

“We observe unfilled opening downside gaps in the last few sessions, indicating a formation of bearish runaway gaps. These unfilled down gaps are normally formed in the middle of a trend, suggesting that more weakness could follow in the coming week.”

With Nifty falling below its 22,400 support level (20-month EMA), further declines toward 21,800-21,700 levels could be expected in the near term. The immediate resistance is placed around 22,300, where selling pressure is likely to emerge.

Investors Remain Cautious as Market Volatility Persists

Broader indices underperformed significantly, with BSE Mid-cap and Small-cap indices recording steep losses.
IT stocks saw the worst decline, reflecting concerns about deal slowdowns in the U.S. tech sector.
Small-cap stocks suffered heavily, with over 200 companies posting double-digit losses.
Technical indicators suggest further downside, with Nifty50 testing key support levels around 21,800-22,000.

As the market grapples with high valuations, foreign investor outflows, and global macroeconomic concerns, investors are advised to tread cautiously. Short-term volatility is expected to persist, but experts suggest that a market recovery could materialize once earnings visibility improves in FY26.