Although many would disagree with the above expression, size does indeed matter when it comes to many things, including stocks. Whether choosing small caps, large caps or mega caps, investors will need to know when it’s time to switch and be on the right side of the trade.
For beginners, a stock’s size is found by multiplying the current share price times all outstanding shares of the stock. Generally speaking, in the US markets, stocks with less than $2 billion in total capitalization are called small-caps, stocks with total capitalization between $2 billion and $10 billion are called mid-caps and stocks with over $10 billion capitalization are called large-caps.
Ever since the beginning of the bull market, small-caps have been benefiting from investor’s increased appetite for risk, but that appears to be coming to an end. The chart below shows that small-caps have been in a trading range (a sign of indecision) since the beginning of this year, despite the fact that their larger relatives have been reporting higher highs. A more worrisome sign is the “death cross” observed over the last week were the small-cap index 50-day moving average dipped, for the first time in many years, below its 200-day moving average.
As the bull market matures or when investors become nervous about the market, they tend to allocate assets to the “safer”, less volatile large-cap names rather than speculate on the more volatile, “riskier”, small-cap space. This can be observed in our next chart where we use our relative strength analysis or ratio between Russell 2000 (small-cap index) and the S&P 500. Although the S&P 500 is a proxy for the broad US equity market, the majority of the companies comprising the index are large-caps. As a reminder, a falling ratio indicates that large-caps are outperforming (up more, down less) small-caps while the opposite occurs when the ratio is rising.
So far this year, size does matter and bigger is better. Take a look at the chart below were we use a relative strength analysis or ratio between the top 100 large-cap stocks in the S&P 500 vs the entire S&P 500. The top large-cap stocks have taken the lead for the first time since 2012. At the same time, momentum for the top 100 large-cap stocks vs the S&P 500 as measured by the Moving Average Convergence Divergence (MACD) oscillator has also turned positive for the first time since 2012.
“Boring beauties” have woken up and are not so boring anymore. Investors can take advantage of this opportunity through low cost Exchange Traded Funds (ETFs) such as the iShares S&P 100 Index Fund (ticker OEF) or the Vanguard Mega Cap Growth ETF (ticker MGK). Both funds are up by 9.02% and 8.65% respectively year to date.
Costas Pierides CFTe, MSTA
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