Small caps outperformed the market today.
One day doesn’t a trend reversal make, but this situation could get interesting.
On November 24, I wrote that big company stocks were now outperforming small company stocks https://jubakpicks.com/2009/11/24/big-caps-start-to-beat-small-caps-whats-that-all-about/.
Reasons for that, I suggested, included the greater exposure of big company stocks to a weak dollar. Big U.S. companies tend to have a greater percentage of their sales coming from overseas than small companies do. That means they get a bigger boost to earnings and sales when strong local currencies are converted into weak dollars. These companies also get a competitive edge from a weak dollar since they’re selling a larger share of their product to overseas customers who find it cheaper than local products due to a falling U.S. dollar.
But today, December 4 after the surprisingly strong jobs number of that morning, small company stocks, as represented by the Russell 2000 index outperformed big company stocks.
I have to wonder, if small company stocks got a boost in popularity from a rallying dollar. A stronger dollar would hurt big companies relatively more, in the same way that a falling dollar helped them.
Seems possible.
But it also seems like an over-reaction like the reaction to one month’s unemployment numbers as a whole. I don’t see any dollar rally lasting long enough to provide a relative edge to small company stocks.
But as I said, this could get interesting.
Jim
What is the best way for a small investor (with another a day job) to invest in small caps? individual stocks? ETFs? mutua funds? Appreciate any advice.
If you do not mind sharing, about what % of your portfolio do you keep in small stocks?
thanks
Small cap stocks as measured by the Russell2000 have outperformed the S&P500 at least since the market bottom on March 12, 2003 on a buy and hold basis, not considering dividends. They have also outperformed the S&P500 since the recent market bottom of March 9, 2009 by about 12% on the same basis.
Small cap stocks have done this with more volatility. The old saying of the greater the risk the greater the return applies here; corrections for small cap stock ETFs like IWM were more severe than for the SPY. The 20-trading day annualized volatility of the IWM is 24.6% and for the SPY it is 15% both as closing prices this Friday.
Looking at a weekly frequency chart of the IWM going back to 3/12/03, the IWM corrects with lower lows and lower highs for 3-4 months before bursting higher again (during the bull market phase). I think we are now at the end of a consolidation period for the IWM and we can look forward to larger gains for the IWM compared to the SPY if the general uptrend of the market continues through the spring of 2010—but this is only from a technical perspective.
Of course, large cap stocks were the place to be from 1995 to 2000—but that was a period of a strengthening $US. So the question is: what do the economic fundamentals say about the relative merits of small caps versus large caps for the near term and the intermediate term? There are too many economic and financial crosscurrents at work now which are beyond me to sort out. Therefore, I’m diversifying with some high yielding small/mid/large cap stocks and small/mid cap stock ETFs, call options on sold off Jubak’s picks with a dollop of foreign stocks and finally lots of TIPs (instead of money market mutual funds).
I look at the US small/large cap discussion a little differently seeing momentum fading in both and SPY could soon follow IWM downwards. As I posted on my site http://scottsinvestments.blogspot.com/2009/12/russell-2000-lagging.html:
The S&P 500 (as represented by SPY) is hitting resistance around $112, it still remains near its 2009 high. Price always pays and should take precedent. However, two of the most widely followed indicators, RSI and MACD, have shown negative divergence since August. While investors have hesitated to sell large cap stocks at current levels, price activity of “riskier” small caps tell a different story.
The Russell 2000 (as represented by IWM) has drifted lower since a double top around $62.50 in September and October. For bulls, they would consider the current move a consolidation and bears may see it as the beginning of further downward moves. However, today’s close below the 50 day moving average indicates an intermediate bearish trend and IWM has had difficulty sustaining itself above the 50 day SMA since October. The long term trend is still positive as long as IWM remains above the 200 day moving average. $62.50 is a price level to watch on the upside and the November low of $55.33 would be a price level to watch for further downside confirmation. IWM showed negative divergences in October and subsequently began to move lower. Will SPY follow suit?
Large caps usually pay sizable dividends and dividend yields should be kept proportional to interest rates.
Let me see if I have this right. When the dollar is down stocks have been going up as people get cheap dollars and buy stocks particularly emerging markets, gold and large caps. When something good happens like falling unemployment the dollar increases as people believe the US may be back. Gold falls as well as large caps ;however, small caps increase as people think about growth.
Seems to me either way the US market goes up. When do valuations come into play? It seems the market is moving on emotion and not earning and P/E ratios.
Maybe small caps will be a good hedge to gold in the short term (gg, gld)
Interesting point. Small caps might be an emerging opportunity. A weakening dollar favors exports. The US government is working to stimulate banks to support small businesses. Both could help the small cap sector crawl out of this mess.
Jim,
you are like professor teaching and explaining every move of the market which is very important to make decisions. Thanks a lot.
I was where you were 10 years ago, “acxsasx”, when I found Jim and was just as bereft when he disappeared from msn. He is a treasure and I have recommended him to my niece who has just started down this road to investing.
Thanks Jim.
Petunya
Mr. Jubak,
Thanks.
I “found” you about two years ago on MSN. Then when you disappeared from there for a period of time, I hoped that all was well with you and in the same thought I felt I had lost a trusted friend. Your transparency struck me immediately as I sought to learn about investing via the internet.
I now read your posts almost as soon as you post them (thanks to gmail and my droid, though I own an iPhone for app development and find it a bit more polished).
Thanks to your advice and more importantly your sharing the “why” of your advice, I have been slowly building positions for the past 2 years, a month at a time based on your recommendations. Through my dollar cost averaging and using your advice as a starting point, I have an over 7% return. All buys with just 5 stocks. Not too bad for someone who 2 years ago never bothered with the stock market.
Thank you. Without your articles, I would not have been able to slowly but surely be making gains.