Size Matters…to Investors

Some troubling signs of risk aversion have emerged in recent days: Investors have shied away from smaller cap high beta stocks as they continue to display a strong preference for larger cap secular growth names that have been working such as $AAPL, $IBM, $MA, $PCLN, and $V. The Russell 2000 ($IWM $RUT) led the January market rally, however, ever since the small cap momentum peaked on February 3rd the Russell has found itself trading in a sloppy haphazard range bound oscillation between 78.17-84.66:

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Meanwhile, the junior gold miners ($GDXJ) are a striking example of smaller cap underperformance as they have been trounced (down over 27% from the early February high) over the past two months:


One of my favorite relationships to look at is $DIA/$IWO which helps to highlight investors level of risk appetite by comparing the mostly mega-cap Dow to the Russell 2000 Growth Index – today it peaked its head back above a crucial “line in the sand” at 1.40:


The recent market aversion to small caps is a yellow flag that should definitely be made note of. While the early August plunge began in similar fashion there have been plenty of false signals given by small cap weakness in the past (early March)- although it must be said that the recent weakness in small caps has also been confirmed by several other sectors ($XLE, $XLF, etc.) which wasn’t the case in early March. Moreover, the percentage of S&P 500 stocks above their 50-day moving averages has fallen below 50% for the first time since the rally began in December – this is one of the clearest signs that the momentum has faded and equities are now more than likely in a medium term consolidation:


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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