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Small-Caps Are Standing Tall

21 March 2014 in Trading Ideas

Although the S&P 500 has only gained 0.6% so far this year, the broader market has rallied 6.7% from its 2014 low on Feb. 4.

However, as with many of the recent market runups, the coinciding performance by small-cap stocks has been just a little better.

The Russell 2000, for example, is up 8.6% since the S&P hit that low, echoing what it has done over the past 12 months. In that timeframe, the Russell 2000 has gained 24.8% to the S&P 500’s 21.9% rise.

Similarly, the Small-Cap Stars motif is up 5.7% in the past month; the S&P 500 has increased 1.3%.

In the past 12 months, the motif has gained 29.5%.


As TheStreet noted earlier this week, US small-cap stocks look poised to outperform the S&P 500 in the first quarter of 2014 – and that’s after beating the S&P 500 the past two years. Continued strength in small companies, could be a good sign for the overall market, TheStreet said, because it suggests investors are comfortable taking on risk.1

But it may not just be only the nod to overall risk: TheStreet pointed to one portfolio manager who manages a low-volatility returns portfolio who recently noted that US small-caps are more of a play on the US economy since large-cap stocks are multinational corporations that generate a higher percentage of revenue in international markets.

“I like US small-caps as a core holding,” the manager said. “They tend to have higher volatility than large-caps but also tend to outperform large-caps over longer periods.”

One of those longer periods includes the market’s performance since the March 2009 bear-market bottom. Since that time, the Russell 2000 index has jumped 251%, while the S&P 500 has gained under 175%.

However, it’s worth mentioning that many analysts are starting to question how much run is left in small-caps given their recent performance.

Jonathan Krinsky, chief market technician at MKM Partners, has noted that the small-cap rally has the Russell 2000 trading nearly 40% above its 200-week moving average. Krinsky says that level has been consistently bad news for the index, presaging a fall in the subsequent three months 94% of the time since 1982, with an average decline of 7%.2

Credit Suisse analyst Lori Calvasina says the Russell is now near 19 times future earnings, a level that has been consistent with a slight decline over the next 12 months.

And one other macro consideration to keep in the recipe is that while it’s true that a small-cap rally may have out-accelerated the broader-market index, it stands to reason that it can also feel the more pronounced painful results of a market turnaround.

None of which, of course, means that a decline in small-cap stocks as a whole is imminent. However, investors could be well-advised to at least be wary of crossing into territory that hasn’t always been kind to small-caps.

1Xavier Brenner, “Small-cap stocks still in the driver’s seat,” TheStreet, March 13, 2014, http://www.thestreet.com/story/12528626/1/small-cap-stocks-still-in-the-drivers-seat.html, (accessed March 17, 2014).

2Ben Levisohn, “Stocks Perform a Balancing Act,” barrons.com, March 15, 2014.