Research Excerpts

Watch Small Cap Stocks As A Leading Indication Of Broad Market Direction

Posted on: Tuesday, October 9th, 2012

The following (green font) is an excerpt from our September 21st Asbury Alert, entitled Closing Out Our Overweight In Small Cap.

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Asbury Alert: September 21st, 2012
Closing Out Our Overweight In Small Cap

In our August 6th Keys To This Week we said:

“…the Russell 2000 has become quarterly oversold versus the US broad market index (the S&P 500), and previous instances of this have coincided with or led literally every multi-month period of relative outperformance by the Small Cap index in recent history.”

Chart 1, which was the accompanying chart from that report, appears below.

Chart 1

Since August 6th through 10:00 am ET this morning (on September 21st) the S&P 500 (SPX) has risen by 5.2% while the Russell 2000 (RUT) has coincidentally risen by 8.2%, resulting in 3.0% of relative outperformance by RUT in just about 6 weeks.

Our momentum metric has now shifted back towards relative underperformance as of the close yesterday (September 20th) , which suggests that this is a good time for managers that have been overweight the index to consider capturing that 3% of relative outperformance.

Moreover, because RUT is currently testing major overhead resistance at 856 to 869 as shown in Chart 3 below, representing the June 2007 and May 2011 benchmark highs, while technically overbought on both a monthly and quarterly basis, it is now particularly vulnerable to both outright weakness and relative underperformance versus the S&P 500.

Chart 3


Since our September 21st report the relative performance of the Russell 2000 has reversed, as RUT has already underperformed the broad market SPX by 2% through the close yesterday (October 8th) while declining by as much as 28 points or 3.3% on an outright basis.

Small Cap. along with Technology, typically leads the US broad market both higher and lower, so identifying these emerging trends of relative outperformance/underperformance can (and does) tell us a lot about upcoming US broad market direction.

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