July 2026 Investment Letter

July was a month in which the headline indices told investors almost nothing, and the market beneath them told them everything. There is nothing wrong with this market — only something to understand. As for the recent turmoil: the damage was faster than it was deep.

That will not have felt true to anyone watching a screen through July. Plenty of stocks fell, the news flow was relentlessly negative, and commentary swung between panic and boredom, sometimes in the same afternoon. But falling prices and a bad mood are not the same as a broken market, and one of the most valuable skills an investor can develop is the ability to tell the two apart. What actually happened in July is that the market ran a quiet sorting exercise: it punished the crowded and the mediocre, left the genuinely strong largely untouched, and moved the opportunity into a narrower set of places than it occupied six months ago.

Market Overview: The Index Is Not the Market

Begin with an idea that separates professional investors from everyone else, because everything downstream depends on it: the index is not the market. When people hear that "the market was flat," what is usually being described is a headline index — a small, weighted club of the very largest companies. A handful of giants can hold an index perfectly steady while, underneath them, the typical stock is quietly falling; the reverse happens too. The index is a summary written by the biggest companies in the room, and the real story is what the other several hundred are doing.

To read that story, the focus is not the index but market breadth — a measure of how many stocks are actually participating, rather than how a few large ones are behaving. Breadth is the difference between a market where a thousand stocks are rising together and one where ten stocks are dragging a tired index along behind them. This month, breadth is the whole plot.

Market Breadth: What July Actually Did

To measure breadth, the approach looks across the entire investable universe — roughly 750 stocks, from the largest companies down to the smallest — and asks each one a simple question: is it trading above its key moving averages, or below? A moving average is simply a stock's average price over a recent period, acting as a rough dividing line between health and weakness. Two matter here, and the gap between them tells the whole story of July:

• 50-day moving average — measures short-term momentum. It reacts quickly and breaks easily.
• 200-day moving average — measures the long-term trend. It moves slowly and is much harder to break; this is a stock's underlying structure.

Ten trading sessions ago, 65% of stocks were trading above their 50-DMA and 60% above their 200-DMA. Today, 44% remain above the 50-DMA while 50% remain above the 200-DMA. Read those changes together: short-term participation deteriorated sharply, while long-term participation barely moved. The majority of stocks that lost their short-term momentum still maintained their long-term structure. They wobbled; they did not break. In one sentence: the damage was faster than it was deep.

There is another statistic that supports confidence here. Historically, the percentage of stocks trading above their 200-DMA has oscillated between roughly 39% at moments of maximum pessimism and 61% at moments of maximum optimism. Today, at 50%, the market sits almost exactly in the middle of that range — and markets in the middle of the cycle rarely reward aggressive optimism or excessive pessimism. They reward selectivity.

Momentum Versus Trend: Why "Fast, Not Deep" Matters

Every major market decline follows a sequence: momentum weakens first, structure breaks later. The 50-DMA almost always fails before the 200-DMA, because short-term momentum reacts faster than long-term trends. When short-term breadth deteriorates while long-term breadth remains healthy, the market has experienced a reset in momentum — not a destruction of structure. That is the hallmark of a shakeout, not a breakdown. A true bear market would show both momentum and long-term structure deteriorating together, and that is not what July presented. The weekly price action was uncomfortable, but the underlying market structure remains intact — an important distinction.

Where Capital Is Still Working

Breadth measures how healthy the overall market is; relative strength shows where capital is choosing to stay. When breadth narrows, capital rarely leaves the market entirely — it becomes increasingly selective, exiting weaker businesses and concentrating in companies that continue to show resilient earnings, improving fundamentals and stronger technical structures. Today, leadership remains concentrated in pharmaceuticals and hospitals, microfinance institutions, NBFCs, smaller private-sector banks, defence, select recent IPOs, two-wheeler automobiles and new-age consumption businesses.

Several previous leaders are undergoing healthy consolidations rather than structural deterioration — including metals, capital goods, engineering services and power. Meanwhile, caution remains on areas where both relative strength and market structure are weak: telecom, FMCG, cement, and rural- and SME-focused businesses. One theme appears consistently across sectors: leadership increasingly belongs to smaller companies rather than the largest names.

The Global Picture: Two Structural Gaps

To understand why Indian large-caps continue to underperform, it helps to step outside India. Capital competes globally — it does not compare one Indian company with another, but every opportunity available around the world. Today, India faces two structural challenges.

1. The earnings gap. Large American companies are currently expected to deliver roughly 18–22% earnings growth, while comparable Indian large-caps are expected to grow closer to 9–11%. Global investors naturally allocate toward stronger earnings growth. This does not make Indian large-caps poor businesses; it means they are competing against faster-growing opportunities elsewhere.

2. The theme gap. Markets do not reward earnings alone — they reward participation in transformational themes, and today that theme is artificial intelligence. Global AI and semiconductor companies remain at the centre of international capital allocation, and India has very limited exposure to that theme at the large-cap level. As a result, foreign investors have relatively little incentive to raise allocations to Indian large-caps while global AI leaders offer stronger earnings growth and greater thematic relevance. This explains much of the recent divergence between Indian large-cap indices and the broader market.

Where the Bull Market Actually Exists

The strongest trends are not in the largest companies; they are within small-, mid- and micro-cap businesses. The Microcap 250, Smallcap 250 and Midcap 150 indices continue to display higher highs, higher lows, rising 50-day moving averages, and healthy pullbacks that keep respecting long-term trends. This leadership is supported by a structural force that keeps strengthening every month: domestic liquidity. Systematic Investment Plans, domestic mutual funds, family offices and individual investors continue to provide a consistent source of capital to Indian equities. Unlike foreign institutional flows, this capital remains patient, systematic and long-term — and that has fundamentally changed the character of the Indian market.

India's Quiet Structural Transformation

One of the least-discussed developments of recent years is the evolution of India's market itself. Historically, India behaved like a high-beta emerging market — highly dependent on foreign capital and extremely sensitive to global risk sentiment. That is gradually changing. Steady domestic participation has created a market that is deeper, more diversified and significantly more resilient than in previous decades. Should earnings improve and foreign capital eventually return, India could become one of the most attractive emerging markets globally — not because of speculation, but because of the strength of its underlying structure.

Investment Philosophy

Markets constantly test patience. The greatest opportunities rarely appear when headlines are optimistic; they usually appear when uncertainty feels uncomfortable. That is why the focus stays, in order, on market structure, relative strength, earnings quality and risk management — with news coming last. Allowing headlines to dictate decisions turns an investor reactive instead of disciplined, and markets reward evidence, not emotion.

Portfolio Positioning

Positioning remains straightforward: staying invested in businesses that maintain their long-term structure while avoiding areas where relative strength continues to deteriorate. The book remains constructive on smaller private-sector banks, NBFCs, healthcare, defence and selective small- and mid-cap opportunities, and cautious toward large-cap indices until the earnings gap and thematic gap begin to narrow. Risk management continues to guide every decision — cash and discipline are positions too, and neither is ever idle.

Key Lessons

• Participation matters more than the index. The health of hundreds of companies says more than the movement of a few large stocks.
• Fast is not the same as deep. Momentum often weakens long before long-term trends break.
• Capital competes globally. Understanding international capital flows explains much of today's market behaviour.
• Leadership currently resides in smaller companies. That is where both structure and relative strength remain strongest.
• News is often most negative when opportunity is greatest. Decisions should rest on evidence, not headlines.

Research Watchlist

A central part of the process is continuously researching businesses and sectors that show improving fundamentals, strengthening relative strength or emerging leadership. Research does not imply investment — it simply reflects where the market appears to be offering the most interesting opportunities for further study. This month, research remains focused on smaller private-sector banks, NBFCs and microfinance institutions, healthcare and hospitals, defence companies, and automobiles and auto ancillaries (particularly two-wheelers). These are areas of active research rather than recommendations; every decision continues to depend on valuation, earnings quality, market structure and disciplined risk management.

Long-Term Thesis Tracker

• Small & Mid Caps — Very Positive: leadership remains concentrated in quality businesses supported by strong domestic participation.
• Large-Cap Banks — Neutral: stable businesses, but global capital continues to favour stronger international opportunities.
• Smaller Private Banks — Positive: improving earnings quality and strengthening technical structures.
• NBFCs — Positive: strong momentum supported by healthy participation and improving fundamentals.
• Healthcare — Positive: continues to demonstrate broad-based market leadership.
• Defence — Positive: long-term structural outlook remains intact.
• Capital Goods — Constructive: a healthy correction within a broader uptrend.
• Metals — Constructive: consolidation rather than structural weakness.
• Large-Cap IT — Neutral: facing continued headwinds from global AI-driven capital allocation.
• Domestic Liquidity — Very Positive: continues to provide a strong structural foundation for Indian equities.
• Foreign Institutional Flows — Neutral: allocation remains influenced by global earnings and AI leadership.

What to Watch Next Month

• Whether market breadth begins improving, particularly the percentage of stocks reclaiming their 50-DMA.
• Whether small-, mid- and micro-cap leadership continues strengthening.
• Quarterly earnings from large private-sector banks.
• Developments within the global artificial-intelligence ecosystem.
• Foreign institutional investor positioning toward Indian equities.
• Domestic mutual fund and SIP flows.
• Whether leadership stays concentrated in healthcare, defence, NBFCs and consumption, or begins rotating toward new sectors.

Conclusion

There was nothing fundamentally wrong with the market in July — only a market doing what healthy markets periodically do: resetting momentum, filtering leadership, and quietly rewarding discipline over emotion. The responsibility of an investor is not to predict every movement, but to understand market structure, recognise where capital is flowing, remain patient through uncertainty, and keep allocating where evidence — not headlines — supports long-term wealth creation. The philosophy is intended to last a lifetime.