The End of the "Big" Bear Market
by Jeff Clark
August 11, 2006
After six years of big performance… small isn’t looking so hot anymore.
Several times over the past few months, I’ve commented on the inevitable change in trend from a market that favors small stocks to a market where large cap stocks take the lead.
By the looks of the following chart, that change is happening now…
This chart displays the ratio of the performance of S&P 100 stocks (large caps) to S&P 600 stocks (small caps). A declining chart indicates that small caps are leading the way, whereas a rising chart indicates large cap out-performance.
Notice how this ratio recently climbed above its 200-day moving average. While that’s happened a few times over the past several years, it’s never done so from such an absolutely low level.
So I’m inclined to believe that this recent move is the real deal… that large cap stocks are finally taking the lead over small. After all, logic is on our side here…
Logically, rising interest rates are harder on small cap companies than on large caps. Logically, rising commodity prices take a bigger bite out of the income statements of small companies. Logically, large companies perform better in difficult economic times.
Also logically, in a market that is less tolerant of risk, it makes more sense to own a conservative stock like General Electric (GE), than it does to own a high flyer like Hansen Natural (HANS).
Owners of Hansen saw this theory at work when the stock dropped 25% on Monday’s disappointing profit numbers.
Favoring large caps over small certainly hasn’t made you any money over the past six years, but I’m betting it’ll be profitable over the next few.
So… if you’re still heavily invested in small cap growth stocks, it’s time to lighten up.
And if you’re not exposed to large, stable companies like those in the Big Pharma sector, it’s time to become so.
Best Regards & Good Trading,
Jeff Clark
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