Qualcomm stock is up 13.2% this year, and 42.2% during the past 12 months. Market capitalization has...
Is a Small-Cap Trap Brewing?
02/27/2013 9:40 am EST
While it's still uncertain whether the current correction will recover or deepen in the near term, MoneyShow's Tom Aspray makes a compelling case why investors should not sell their small-cap stocks and run just yet.
The stock market was able to stabilize Tuesday after Monday’s sharp slide, which was positive, and the futures are a bit higher early Wednesday. This is not enough yet to conclude that the market’s correction is already over.
For now, a broad trading range with a downside bias seems the most likely path over the near term. It would take a strong close above Monday’s early highs to suggest that the correction is already over.
In a recent Wall Street Journal article, “The Small-Cap Stock Trap,” it was pointed out that the Russell 2000 is up 19% since the November lows, versus just an 11% gain in the Dow Industrials. The author suggests that the recent strength of small-cap stocks may be trapping investors with higher risk.
As I noted yesterday, the iShares Russell 2000 Index (IWM) has already dropped almost 4% from its highs. However, from a technical standpoint, I do not think that the rally in small-cap stocks is over. A historical look at recent rallies in this area suggests that they should still be on your buy list during the market’s current correction.
Chart Analysis: On the weekly chart of the iShares Russell 2000 Index (IWM) that goes back to 2009, I have highlighted several periods of strength in small-cap stocks. The performance values are calculated from low to high, and therefore are high, as no one gets in at the low or out at the high.
- From the July 2009 low to the May 2010 high, IWM was up 57.4% (line 1).
- The following correction ended in August 2010, and during the next rally (line 2) IWM gained 47.6%, peaking in May 2011.
- The 40.8% rally from the lows in October 2011 lasted only until March 2012 (line 3).
- From the November 2012 low at $76.13 up to the recent high of $92.68, IWM is up just 21.7% so far.
- The weekly relative performance moved above its WMA on December 1, and before the end of the year broke its long-term downtrend (line b).
- The weekly RS analysis is still positive, and the daily (not shown) did confirm the recent highs.
- The weekly on-balance volume (OBV) moved above its WMA in the middle of December, and broke through strong resistance (line c) in early 2013.
- The OBV has turned lower, but is still well above its rising WMA.
- So far, the support in the $88.80 area is holding, with the 38.2% Fibonacci retracement support at $86.28.
- A daily close above $91.53 would be a sign that the correction is over.
NEXT: How This Affects 2 Related Funds|pagebreak|
In the December 12 article Profit Now From January Effect, I recommended two closed-end funds, one of which was the Royce Value Trust (RVT). It is a closed-end fund with a capitalization of $1.1 billion and an expense ratio of 0.68%.
- RVT spiked to a low of $12.03 last November.
- The weekly chart shows that it peaked last week at $15.03, which was well below the 2011 high of $15.90.
- There is initial support at $14.33 to $14.40, and for March the monthly pivot support is at $14.31.
- The 38.2% Fibonacci support and the rising 20-week EMA are at $13.88. The 50% retracement support stands at $13.53.
- The weekly relative performance broke its downtrend (line b) in the middle of December.
- The RS line is well above its WMA and support (line c).
- The weekly OBV did not break through its resistance (line d) until the early part of January.
- So far, the correction looks pretty normal, and a close back above $14.90 would be positive.
The Royce Micro-Cap Fund (RMT) has a capitalization of $1.1 billion and a fairly high expense ratio of 1.58%. From the November lows to the recent highs at $10.44, it has gained 24.6%, which is a bit less than RVT.
- The weekly chart shows that the 2011 high (line e) has been reached.
- So far, there has not been much of a correction. First good support sits at $10 to $10.10.
- The rising 20-week EMA and the 38.2% Fibonacci retracement support are in the $9.69 to $9.87 area.
- The long-term downtrend in relative performance (line f), was overcome the week ending December 22. Also, the WMA of the RS line is rising strongly, which is a positive sign.
- The weekly OBV was able to overcome resistance going back to 2011 (line g) at the end of January.
- The daily studies are clearly positive, and show no signs yet of a top.
What it Means: The seasonal tendency is for iShares Russell 2000 Index (IWM) to bottom in the October to November period. From a February high, IWM typically corrects until March 9, before forming a final high in early May.
In my comparison of the mid- and small-cap stocks earlier this month, I noted that mid caps were starting to act a bit stronger than small caps. This is still the case, but both continue to look better than the large-cap Spyder Trust (SPY).
Once there are clear signs that the correction is over, I will be looking to buy both small- and mid-cap stocks, as well as ETFs.
How to Profit: No new recommendation for now.
Portfolio Update: Investors should still be long the Royce Value Trust (RVT) from $12.98. Half was sold at $14.55 or better for a minimum 12% profit. Keep the stop at $14.18.
Investors should also be long the Royce Micro-Cap Fund (RMT) from $9.08. We sold half at $10.18 or better for a 12.1% gain since mid-December. Keep your stop for now at $9.94.
Related Articles on STOCKS
Of course, there are arguments as to why China should or should not bow to U.S. demands, and the inv...
Headquartered in New Jersey and founded in 1891, Merck & Co. (MRK) is a global health care compa...
Founded in 1902, Minnesota Mining and Manufacturing (MMM) started as five businessmen set out to min...