'1,500-1,600 pts Nifty fall in 3 months': JM on what if market benchmark slips below 22,000

"If recovery fails and Nifty breaks below 22,000, expect a meltdown of another 1,500-1,600 points over next three months," it warned.

In the past, whenever the index has broken 200-week EMA, it has seen strong declines in the short term, but some of the best opportunities for long-term wealth creation, JM Financial said.

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The domestic brokerage said Nifty's market breadth has deteriorated sharply, with only 24 per cent of stocks trading above their 50-day moving averages (DMAs). Just 22 per cent are above their 200-DMAs, placing largecap breadth close to stressed territory.

"Importantly, the weakness is therefore not restricted to midcaps and smallcaps. Even the Nifty 50 is experiencing considerable internal breadth deterioration. The recent uptick in 50-DMA breadth for largecaps suggested the first signs of stabilization," it noted.

However, JM Financial viewed the broadening market stress across market-capitalisation segments as a sign that the foundation for a broader recovery in market breadth was being formed.

JM Financial said Nifty had underperformed the Nifty Midcap 100 for a prolonged period, with the Nifty-to-Midcap 100 ratio in a persistent declining trend since 2021, indicating that midcaps had significantly outperformed largecaps over the longer term.

"The ratio is approaching a historical extreme: The Nifty/Midcap 100 ratio is currently around 0.40, close to the lower end of its long-term range. This suggests that the relative valuation/performance gap has become stretched," it said.

Despite improving momentum, 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, JM Financial said.