Russell 2000 adds 3%
Small-cap investors are breathing a bit easier this Tuesday morning after the Russell 2000 small-cap index finished last week on a high note. After four down weeks, many investors were holding their breath waiting for at least a pause in the decline. The index, which is a barometer of small-cap stock performance, was finally able to break above 600 last Thursday and finished just off its high to close at 605. The performance of small-caps on Friday was bullish as well, and the Russell finished the week at a 610.72, the highest level since February 3rd.
Equally important, the index broke a string of four down weeks as strength in small cap stocks lead the major indices. Last week the Russell was up 3%, well ahead of the Dow Industrials and the Standard and Poor 500, both of which were up .9%. The tech-heavy NASDAQ was a strong performer as well, rising 2% on the week.
***A look at a one year chart of the Russell 2000 clearly shows last week's reversal which came at a multi-month low of 580. Looking at the chart you can see that the Russell is now targeting its 50-day moving average (blue line) around 620 as its next near term resistance level. So far today the index is gaining on this level and a close above it would make small-cap investors happy indeed. That said, I do have my doubts that we will see the index regain the 52-week high of 649 in the near-term. We'll need to get come clarity regarding the debt issues in Europe and forward guidance out of China (that factors in interest rate hikes) before the markets will want to make a strong move higher.
So what should we expect in the coming weeks for small-cap stocks? The unfortunate answer is that we should not expect a clear trend. The performance of stocks in 2009 was so strong that it was actually difficult to purchase stock in a publicly traded small-cap company and not have it go up. Those days are gone. We'll need to be far more selective in 2010 as the markets digest, and react, to new news regarding the health of the global economy. That means we need to do two things: (1) focus on quality stocks, and (2) remember that the market is paying attention to news again.
I'm not going to discuss individual stocks today, but the themes I've been hammering on for the last couple of months are still critical as we screen the small-cap universe for profitable investments. I've been writing that we need to focus on quality in 2010. That means picking up small-cap stocks at attractive valuations. It also means focusing on companies with a history of strong earnings and sales growth, and projections for strong earnings and sales growth in the future.
And I'm not the only one who is calling for strength in small-caps relative to large-caps in 2010. A recent Credit Suisse report on top small-cap ideas essentially mirrors my overall thesis. In fact, the report opens with the following endorsement of small-cap investing in 2010: "With investors' risk appetite continuing to recover and with signs of improvement in the U.S. economy, we believe that small-caps will outperform large-caps at least through the first half of 2010."
***To give a little historical perspective on where the Russell 2000 is in relative terms I've included a three year chart. Like the one year chart shown above, the three year indicates to me that we should expect the index to trade in a near-term range between 660 and 550. Within that range, I'm targeting two key price levels: an upward move through 620 would likely lead to a retest of 660, while a break of 580 should tell investors to look out below.
Should the index move thorough 620, then 660, I'm looking for a big move higher to 725. Conversely, a drop to 580, then 550, increases the possibility of a bigger drop to 525. But so far today, price action favors the bulls. Buyers are pushing the Russell above 615.
Even though 2010 may be more challenging than 2009, I still expect small-cap stocks will outperform large-caps. This is typical after a recession and the strong out-performance of small-caps last week shows me that investors have not lost their appetite for risk.
Where do you think small-caps, as measured by the Russell 2000, are going in 2010? Let me know by sending me your high and low targets. My address is: editorial@smallcapinvestor.com
