Headlines
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The best small-over-big start in 20 years:
Small-cap stocks have put in one of their best-ever performances relative to large-cap stocks through mid-February. It's the first time they've beat large-caps by more than 10% in 22 years. Historically, this meant further gains shorter-term, but over the medium-term, those gains petered out.
Bottom Line:
See the Outlook & Allocations page for more details on these summaries STOCKS: Weak sell
We're in an extremely speculative environment that is enough to become defensive, especially with recent cracks showing in what had been pristine breadth conditions. The spike in fear from a couple of weeks ago has dissipated and likely not enough to offset the negatives over a medium-term time frame. BONDS: Weak buy
Various parts of the market have been hit in recent weeks, with mild oversold conditions. The Bond Optimism Index is now about as low as it gets during healthy bond market environments. GOLD: Weak buy
A dollar trying to rebound from a severe short position has weighed on gold and miners. The types of signals they've given in recent weeks, within the context of their recent surge, have usually resulted in higher prices over a medium- to long-term time frame.
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Smart / Dumb Money Confidence
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Smart Money Confidence: 16%
Dumb Money Confidence: 84%
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Risk Levels
Stocks Short-Term
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Stocks Medium-Term
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Bonds
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Crude Oil
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Gold
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Agriculture
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Research
BOTTOM LINE
Small-cap stocks have put in one of their best-ever performances relative to large-cap stocks through mid-February. It's the first time they've beat large-caps by more than 10% in 22 years. Historically, this meant further gains shorter-term, but over the medium-term, those gains petered out.
FORECAST / TIMEFRAME
None
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It's been a heck of a year already for small-cap stocks. The Russell 2000 has enjoyed a typical year's worth of gains, and it's only February.
As the Wall Street Journal notes:
Smaller companies are more tied to the domestic economy than their large-cap counterparts, which make more money overseas. Economically sensitive sectors such as energy, materials and banking also account for more of the Russell 2000 than larger indexes. These cyclical groups were battered by the pandemic but are now powering markets to records.
Makes sense. But the last time small stocks got off to such a roaring start relative to large stocks was in the year 2000, not exactly an auspicious precedent.
Using the total return on small-cap stocks versus large-cap stocks going back to 1926, this is indeed the best relative performance for small stocks since 2000, even though it's far from their best-ever.
As for what it means, the table below shows forward returns in small stocks after every time they beat large stocks by at least 10% through trading day #34, roughly mid-February.
There was a pretty good tendency for the momentum to continue in the shorter-term, with positive returns through about the middle of March nearly 90% of the time - there were only 2 losses out of the 19 signals. Then it got hairy. By 6 months later, small stocks showed a positive return only 37% of the time.
How about large-caps? Well, they showed worse short-term returns but held on better longer-term.
This means that the ratio of small-caps to large-caps tended to keep rising shorter-term, and tended to decline over the medium-term.
There are lots of theories about why small stocks are doing so much better than their big brothers in 2021, and most of them make sense. But markets aren't logical. If we go by what history suggests, then smaller stocks may keep beating bigger ones over the shorter-term due to momentum, but over the medium-term, mean-reversion has been a stronger influence.
Active Studies
| Time Frame | Bullish | Bearish | | Short-Term | 0 | 0 | | Medium-Term | 2 | 8 | | Long-Term | 16 | 3 |
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Indicators at Extremes
Portfolio
| Position | Description | Weight % | Added / Reduced | Date | | Stocks | RSP | 4.9 | Reduced 4% | 2021-02-09 | | Bonds | 30.0% BND, 8.8% SCHP | 38.8 | Added 15.1% | 2021-02-18 | | Commodities | GCC | 2.3 | Reduced 2.1%
| 2020-09-04 | | Precious Metals | GDX | 9.0 | Added 0.1% | 2021-02-18 | | Special Situations | 7.3% XLE, 4.8% PSCE | 12.1 | Reduced 5.6% | 2021-02-18 | | Cash | | 32.8 | | |
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Updates (Changes made today are underlined)
With a market that has seen the kinds of broad participation and big breath thrusts like we did in the fall, it's hard to become too negative. Those kinds of conditions have consistently preceded higher returns over the next 6-12 months. It's the interim that's more of an issue. Even conditions like that haven't prevented some shorter-term pullbacks. And when we combine an environment where speculation is rampant and recent days have seen an increase in cracks under the surface of the indexes, it's enough to become more defensive over a short- to medium-term time frame. We still don't have much confirmation from the price action in the indexes, so those who are more conservative would likely wait before increasing cash levels. I've decreased risk exposure a bit more, mainly in terms of energy stocks and the ANGL fund, while adding more to the broader bond market. RETURN YTD: 6.7% 2020: 8.1%, 2019: 12.6%, 2018: 0.6%, 2017: 3.8%, 2016: 17.1%, 2015: 9.2%, 2014: 14.5%, 2013: 2.2%, 2012: 10.8%, 2011: 16.5%, 2010: 15.3%, 2009: 23.9%, 2008: 16.2%, 2007: 7.8%
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Phase Table
Ranks
Sentiment Around The World
Optimism Index Thumbnails
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Sector ETF's - 10-Day Moving Average
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Country ETF's - 10-Day Moving Average
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Bond ETF's - 10-Day Moving Average
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Currency ETF's - 5-Day Moving Average
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Commodity ETF's - 5-Day Moving Average
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