The strong technical action of the small-cap indices suggests that the annual fire sale of small-cap stocks may already be over. MoneyShow.com's Tom Aspray has suggestions on how to participate in this historical period of small-cap strength.
Another strong day for the stock market Tuesday even though pessimistic comments over the fiscal cliff negotiations spurred some late selling. The iShares Russell 2000 (IWM) gained 1.05% while the Spyder Trust (SPY) was up just 0.68%.
The markets are nervously waiting for the FOMC announcement this afternoon with most expecting that the Fed will announce further easing of their monetary policy. This is likely already factored into the stock market so if the Fed disappoints the market it could cause a sharp but I believe a short-term setback.
If the market does pullback what should you be buying? Since 1925, market data indicates that small-cap stocks outperform the broader stock market from mid-December through January. As I noted in last year’s column “The prevailing explanation for this so-called “January Effect” is that investors dump their small-cap losers before the end of the year to book their losses, and this pushes many of theses stocks to bargain levels. This, in turn, sets the stage for a sharp oversold rally into January.”
Using data from Ned Davis Research, this WSJ chart shows how much the weakest stocks in the S&P 500 have outperformed the average from the middle of December through the end of January in the last few years.
According to the WSJ, from 1996 through 2009, the Davis January Effect Stock portfolio “returned an average of 8.6% from mid-December through the end of January, well above the 1.2% gain in the S&P 500.”
There are signs now that the small-cap sector is starting to lead the S&P 500 and these two closed-end small-cap funds should provide a good way to participate in this annual trend.
Chart Analysis: The iShares Russell 2000 (IWM) broke its downtrend, line a, on November 28 and it closed above the 61.8% Fibonacci retracement resistance Tuesday.
The Royce Value Trust Inc. (RVT) is a closed-end fund with a capitalization of $1.1 billion and an expense ratio of 0.68%. The best site I have found for data on closed-end funds is the Closed End Fund Center, and I have inserted their data into this chart. RVT has a well-diversified small-cap portfolio.
NEXT PAGE: Another Fund to Play the January Effect