Eyeing a Ferocious Snap Back in Small Caps

by: Larry MacDonald November 19, 2008 | about stocks: FYX / IWC / IWM / PJM / RWJ / SSK    
Larry MacDonald

Larry MacDonald

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The rebound off market bottoms is usually explosive for small caps. Their average gain in the year following the past seven bear markets surpassed 30%, writes Viking Capital CEO John Sartz in the Nov. 21 edition of Investor’s Digest of Canada.

And once in, you might consider staying. Studies by leading academics such as Kenneth French and Eugene Fama find that small caps average 12% annually over the long run.

The current downturn for small caps is the worse of the past seven says Sartz. Small cap indexes are down by over half. Past declines were 28% to 43% from market peaks. The spring back after the 2008 bear could be exciting. 

We are in the midst of tax-loss selling season too and a lot of small caps are down for that reason. If past tendencies emerge, January could see good snap back.

So small-cap exchange-traded funds (ETFs) look like good places to deploy funds if you are one of the brave now looking to buy low and sell high. In Canada, there is the iShares CDN SmallCap Index Fund. In the U.S., there is:

• iShares Russell 2000 Index (IWM)
• iShares Russell Microcap Index (IWC)
• SPA Market Grader Small-Cap 100 (SSK)
• First Trust Small Cap Core AlphaDEX (FYX)
• PowerShares Dynamic Small Cap (PJM)
• RevenueShares Small Cap (RWJ)

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This article has 5 comments:

  •  
    Nov 19 03:03 PM
    I don't like small caps at all now. They are the ones most hurt by the credit markets freezing up. If VZ is paying more than 500bps over treasuries to issue bonds I have a feeling a lot of small caps who need to borrow will not be able to.
    Reply | Link to Comment
  •  
    Nov 19 11:45 PM
    Don't forget the 2x Russell ETF: UWM.
    Reply | Link to Comment
  •  
    Nov 20 09:18 AM
    This guy is in dream land, to be so simplistic in his analysis is dangerous, the past peformance of small caps has absolutely nothing to do with this market. First we need to have a bottom, there is no bottom to see right now, pundits have called a bottom for the past three- four months, anybody that listened and bought in lost big time. Those that listened and held on because it was to late to sell ,lost big time. People are not selling for tax losses they are selling to preserve what they have left. There is no capitulation selling, this is a death by a thousand cuts and nobody knows when this will end, where the bottom is, the people in the know dont know anything except there will be a bottom someday
    Reply | Link to Comment
  •  
    Nov 20 09:52 AM
    The "january effect" is going to be huge in 2009.

    start buying micro caps now.

    SWHC, TSTR, ALVR, ENG
    Reply | Link to Comment
  •  
    Nov 20 05:13 PM
    With UWM approaching $10 it's stupid not to start accumulating a long position. This is similar to when we were accumulating DUG last summer when crude hit $145. It's tough to pick the exact turn, but it's going to be sooner rather than later.
    Reply | Link to Comment
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