Small cap equities are one of our favourite trading instruments and indicators of the health (or lack thereof) of the equity market in general. Small caps are up there with our favourites because they tend to trend much more than large cap indices making them a trend trader’s dream. Even just five years ago it was rather difficult to trade small cap equities due to the lack of trading instruments. In fact the only means of gaining exposure to them was via the Russell 2000 in the US. Of course now with the proliferation of ETFs a number of different markets can be traded from a small cap perspective. The behaviour of small caps also tells you a lot about the mood of the market and the health of an advance or decline. The pure definition of a bull market is a broad based advance where the average stock rises in a series of higher highs and higher lows. That is where the performance of major market indices (like the S&P 500) is mirrored by the broader market (like the Russell 2000). Ever since March this year small caps have been not only confirming the advance of the S&P 500 but also outperforming it. Bull markets rarely come as perfect as this one. In fact the hardest part of this bull market has been believing what has been put before our eyes. Up until the last couple of weeks it has been difficult to find anyone walking on the bullish side of the fence. Now we know what it was like to be the Lone Ranger!
How far will this rally take us before the next tradeable down phase take hold? We have no idea (seriously). We don’t try to get too cleaver and anticipate the future, we merely watch it unfold.
