January 9th, 2013

Focusing on the Russell 2000 Index

imageAmong the investments in my My Model Portfolio, there’s one Index ETF: the 3x leveraged Russell 2000 ETF.  What has intrigued me over the past several weeks about this ETF is that it continues chugging along, moving higher with no little recognition of the difficulties the S&P 500 is having in matching its all-time high water mark of 1576, let alone being able to cross above the more immediate 1465 resistance hurdle.

While the S&P 500 just barely nudged above its Tech Bubble high with an 85% rise from the 2003 low to the peak just before the Financial Crisis/Great Recession bear market crash in 2007-2009, the Russell 2000 was able to appreciate around 145% over the same period.  Likewise, the S&P 500 Index rose around 114% from the bottom of the Financial Crisis Crash in 2009 to the 2012 high while the Russell 2000 appreciated around 135% to yesterday’s close (click on image to enlarge).

Russell 2000-S&P 500

As they say, past performance isn’t a guarantee of future performance.  But a comparison of the two indexes since 1991 reveals that there’s something more going on here than external economic and financial cycles.  And I believe the answer rests in the stocks comprising both indexes.

Most importantly, the stock with the largest capitalization in the Russell 2000 currently is Ocwen Financial Corp., a savings and loan coming in at $4710.0 million.  The stock at the bottom of the list of 2000 stocks with the smallest capitalization is Ventrus Biosciences Corp weighing in at just $31.0 million.  By comparison, the S&P stock with a capitalization of around $4700.0 is Robert Half Inc.  Not insignificantly, RHI ranks 438th out of 500; in other words, 87.4% of the stocks comprising the S&P 500 Index (or 437 stocks) are larger than even the largest of the Russell 2000 stock.  Not one stock in the Russell 2000 is large enough to be ranked above any of the bottom 62 of 500 stocks in the S&P 500.

To avoid significant liability resulting from a mad rush on a limited supply of stock, Cramer and the rest of the Talking Heads you hear in the business media of necessity might push “best of bread”, large-caps, performance over the past years including the secular bear market suggests a better strategy if you’re looking for some capital appreciation … albeit with more volatility.  Now that we may be at the cusp of some significant upside market action when the debt ceiling “crisis” passes, the place to look for stocks with significant upside potential is among those in the Russell 2000 Index.

Alternatively, if you just want to add some juice to your less risky, mid- to large-cap collection of individual stocks, include a small amount of IWM, the Russell 2000 ETF or UWM or URTY the 2x and 3x leveraged equivalents.  There are also a wide variety of slices of these 2000 stocks if you want to zero in on only the value, growth and mid-cap or small-cap components of the Index.  In sum, variants of the Russell 2000 could be an easy way to capitalize and maximize on any underlying market action.

February 24th, 2012

Wall Street = Lottery Recently?

The stock market always seems like it should be easy when “Monday morning quarterbacking”, when we look at what we could have, should have, would have done if we only could have seen the charts as we see them now in retrospect.  It’s always frustrating and disconcerting to see the opportunities slip by if only we had acted when we were afraid to act.  A perfect example is what happened since the market hit bottom after its 17.27%, 20-day mini-crash that began on July 8 and ended on August 7.

We continue to hear that the market is up a whopping 8.64% so far this year, an advance that’s respectable by most standards given the short period of time it took to log.  Add to this year’s huge move, add the advance from August 7 to last year-end and you get a total move of 21.8%.  Even more impressive was the 27.39% move in the Russell 2000 Index.

However, as I scroll through my charts, what stands out the most is the larger of stocks that have achieved huge run-ups since last summer.  Although 25% of stocks experienced declines, 42% had gains of 30% or more.  When you look at some of these charts, you can’t help but think “Bubble?”  Here are a few examples (click on symbol for chart):

  • BVSN (Broadvision): 265.10% – Internet Software
  • CIE (Cobalt Intl Energy): 232.46% – Independent O&G
  • PATK (Patrick Industries): 221.43% – Lumber, Wood Products
  • ACAT (Arctic Cat): 199.10% – Recreational Vehicles
  • KTCC (Key Tronics): 167.00% – Computer Peripherals
  • LF (Leapfrog Ent): 154.76 – Toys and Games

Ah! If we only had the guts to put it all on red or black or knew which number to pick or which team to bet on.  But we don’t need to.  It seems like the Street has been like the lottery or Las Vegas for the past several months and all we needed to do was to have the nerve to put some money into the market at the bottom last August and we would have felt like we were either extremely lucky or real geniuses.

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December 14th, 2010

Large Cap or Small, the Argument Continues

It seems that the final few weeks of the year are always the time that financial commentators look at the relative performance of large and small cap stocks and conclude that this is the year that large will finally outperform small. At around this time last year, in “Large or Small, That Is The Question?” of December 7, 2009, I commented about a NYTimes article in which Mark Hulbert quoted a report of Jeremy Grantham’s in which they concluded that:

“…the performance gap between the weak and the strong has rarely been as pronounced as it has been since March’s market lows. The extreme outperformance of the more speculative stocks could make them vulnerable to another market shock…..’high quality stocks are about as cheap as they have ever been relative to shares of firms with weaker finances. It’s almost a certain bet that high-quality blue chips will outperform lower-quality stocks over the longer term.”

The following week in “Large or Small, A Correction” on December 13, I responded that the 2010 game plan rests on:

“…..whether you’re looking for a market correction in the new year or a resumption of the bull market. As I’ve written before, I see both happening next year …. a correction first followed by new highs later in the year. The small caps, since they’ve had the greatest gains this year may have already consolidated and will lead the market higher next year. A quick and not overly steep consolidation after New Years will be concentrated in the large caps.”

Here we are, again in early December, and Paul Lim now writes in the NYTimes

“….many market strategists argue that the recent surge for small-cap stocks might turn out to be a good omen for shares of large domestic companies….The performance of small stocks could also be viewed as a sign of confidence that the global economy is on the road to recovery. And that means the bull market in equities that began in March 2009 could live on to a third year — which is another potentially positive development for blue chips….

  • Sam Stovall, chief investment strategist for Standard & Poor’s, says ‘in the third year of a bull market, investors prefer larger boats, as they expect the seas to become a bit more treacherous.’
  • James B. Stack, editor of the InvesTech Market Analyst newsletter and a market historian, agrees. ‘Historically speaking, as bull markets age, investors tend to grow more conservative. I’ll be surprised if we don’t see the S.& P. 500 perform as well or better than small caps in 2011.’
  • ‘Small-cap dominance could be ending if central banks around the world start signaling that they are confident enough in the recovery to start hiking short-term interest rates,’ said James W. Paulsen, chief investment strategist for Wells Capital Management.
  • ‘Frankly, I find valuations on large caps much more compelling than for small. From the standpoint of a contrarian investor, when you see something happen for 10 years, you shouldn’t expect it to continue to outperform over next 10 years.’ said Thomas H. Forester, manager of the Forester Value Fund.”

According to these pros, the deck certainly seems stacked against small caps. But they’re not technicians and don’t put much stock (no pun intended) in what this chart says (click on image to enlarge):

The two indexes (Small cap in black, large cap 500 in blue) moved surprisingly in unison until the “dash for trash” small cap bull market of 2009. While the S&P 500 was stuck in its 12-month horizontal consolidation trading range (which sure didn’t feel like a consolidation while we were going through it!), small caps were volatile but continually forged ahead. I have two takeaways from this analysis: Buckle your seat belts, folks, this could be a spectacular year if you’re in nearly any stock.

  • Small caps have formed a huge inverted head-and-shoulder and you know how these patterns have turned out to be among the most reliable among all chart patterns. By conventional rules of thumb, if this is truly an inverted head-and-shoulder pattern, the small caps just crossed above the neckline then the move might only be half over.
  • Large caps have been laggard and next year could play catch up with many of those stocks actually doubling by next year end.

As the year progresses, the question will increasingly be whether the market is expensive and overvalued, whether declines are corrections or peaks and when will it be time to take some money off the table. It’s times like these that a proven market timing tool like the one that my subscribers see in each of my correspondences will come in extremely handy.

December 14th, 2009

Large or Small, A Correction

Last week, in a comment about a New York Times article, I wrote:

“The S&P 500 Index, the solid blue line is hard to see when overlaid on the bar graph of the OEF, the S&P 100 Index because they’re almost identical. Granted, small-caps marginally outpaced large-caps during July-October but that advantage has eroded since.”

I find that I may not have been comparing sufficiently dissimilar indexes. Because the S&P constructs their indexes by capital weighting them, the S&P100, a subset of the 500 stock index comprised of the largest stocks looks identical. But when you compare with a true small cap index you find a more interesting divergence.

Investors use any of a multitude on indexes to monitor the market’s action. There’s the granddaddy of them all, the Dow Jones Industrial Average, an index of stock prices of the country’s 30 largest stocks. A broader gauge is the S&P 500 Index which combines the stocks of top 500 public companies. An even broader index is the Russell 3000 Index. Furthermore, the broader indexes are subdivided into subsets of like companies, like companies considered small-cap, mid-cap, growth or value.

I usually focus my market monitoring to the S&P 500 Index to the exclusion of all the others but something caught my eye this weekend and I need to correct what I wrote last week: participation in the market’s advance was actually becoming narrower over the past several months. Large-caps have continued to forge ahead while small-caps and, to a lessor extent, mid-caps have consolidated.

The “dash for trash”, when money was flowing into the stock of almost any small to mid-sized company forcing their single-digit prices to double and sometimes triple off their market crash bottoms, ended in September. If there’s going to be higher income tax rates next year as Congress moves to close the Federal budget deficit, then it makes sense to capture those small cap profits this year, at the lower rates. Here’s a chart of the S&P 600, an Index of small caps (click on images to enlarge):

Small caps broke above the neckline of the market’s inverted head and shoulders bottom in July with a two and a half month, 25% bull market spurt. Since mid-September, these 600 small cap stocks have been forming a symetrical triangle. By the way, the Russell 2000 Index, a broader index of smaller capitalization stocks looks the same.

By comparison, the Dow 30 Industrial Average hasn’t shown any indication of a consolidation:
The chart of the Russell 1000 Large Cap Index shows a similar pattern:

Interesting, but what does it mean, how do you play it? I guess the answer rests in whether you’re looking for a market correction in the new year or a resumption of the bull market. As I’ve written before, I see both happening next year …. a correction first followed by new highs later in the year. The small caps, since they’ve had the greatest gains this year may have consolidated already and will lead the market higher next year. A quick and not overly steep consolidation after New Years will be concentrated in the large caps.

That’s my guess. What’s yours?