The decoupling of stocks and indices is happening just as I
suspected it would. Hardest hit lately has been small cap stocks.
Check out the precipitous drop, and subsequent bounce, in the
S&P 600 Small Cap Index over the past week. The index almost
hit its 50-day moving average before turning back up.
This may make you wonder if it's time to jump out of the small
cap foxhole and run for high water, i.e. mid and large cap
Especially when you read the headlines that are all over today:
Dow Breaks Through 12000 For the First Time Since
Man, are small cap investors in the wrong asset class? With many
small caps shedding 10 percent over the last week, or more, is it
time to head for high water?
Not so fast.
Now look at the S&P 600 Small Cap index over the same five
year timeframe as the Dow Jones Industrial Index chart above.
You'll see that the small cap index surpassed its 2008 high in late
2010 - well before the Dow returned to its 2008 level of 12000. In
fact, the Dow still has a thousand points to go before it gets into
the same relative territory as small caps.
So sure, add a little exposure to blue chip stocks to take
advantage of the upside potential - you should always be doing this
since small caps should just make up a portion of your
But that doesn't mean the run for small caps is over. Far from
It does however mean that we need to look to the right sectors
for this stage of the recovery. So let's do that.
Right now, the consensus is that we are in the early to middle
stages of the economic recovery. You can debate this all you want,
but I'm not going to split hairs today. And I truly believe this is
where the economy is.
The important thing is that
thinks we're in the mid-to early stages of the economic recovery,
and that's where I take my direction.
And that means that we need to look to the right sectors to take
advantage of the current market cycle. A handy guide for this
analysis is Sam Stovall's S&P Guide to Sector Rotation. The
below image is courtesy of
Legend:Market Cycle |Economic Cycle
This cyclical rotation guide is saying that from early economic
recovery to full economic recovery, the market is in bull mode.
That's where we are right now.
So the recent dip in small cap stocks isn't a sign to exit the
asset class - it's a sign that you should rotate your holdings to
maximize your gains. Small caps tend to outperform during a
Right now, the market still favors technology, and increasingly,
energy stocks. That means oil, gas, and oil and gas services
***You can make investing difficult, and hem and haw over what
the market is doing. Or you can listen to the market, take your
direction from what it is telling you, and stay the course with the
right industry allocation in small caps - simply the best
performing asset class over the long term.
Right now the market is telling you to allocate to technology
and energy stocks. That's what I'm doing, and I recommend you do
Small Cap Investor PRO
lead analyst Tyler Laundon and I recently added two oil and gas
exploration stocks to the portfolio to take advantage of the
market's sector rotation. Since our original recommendation, these
stocks are up 10 percent and 30 percent - and we believe they have
much more room to go as the market completes its sector
Read why small cap stocks always outperform
during a recession here, then take a trial subscription and get
the full report:
The Best Oil and Gas Exploration Stocks are in the