Microcap ETF: Small Business Woes Suggest Recession Not 'Half Over'

I have virtually nothing to back up my hypothesis. I am merely putting an idea out there... and I have precious little evidence to support it.

Nevertheless, you may indeed feel that my ideas have merit. So I am putting this "unscientific" notion into the blogosphere for your consideration.

The bear market has an official start date of October 9, 2007. And in most, if not all, bull market recoveries, smaller companies outperform larger ones.

It follows that I have spent a great number of days tracking small company stock performance as it relates to large company stock performance. The smallest companies in the exchange-traded fund world may best be represented by the iShares Russell Microcap Index Fund (IWC), whereas the large companies may be represented by the largest 1000 companies in the iShares Russell 1000 (IWB).

In essence, for a bear-to-bull switch to have an air of authenticity, you'd probably need to see the smallest companies gaining ground on larger ones. In fact, I would view that transformation as a potential mid-way point for a recession... where recession mid-points typically mark the start of uptrends.

Since October 9, 2007, however, we see that IWC has yet to "cross over" or climb above IWB. Initially, the likelihood of recession in late 2007 immediately pushed the iShares Russell Microcap Index Fund (IWC) as much as 10 percentage points lower than the iShares Russell 1000 (IWB). Leading into September 2008, however, IWC began closing in on its bigger brother, IWB.

What changed? With the Lehman failure, Fannie/Freddie takeover and TARP legislation, any notion that credit would be restored rapidly was dismissed. Not surprisingly, small companies in the iShares Russell Microcap Index Fund (IWC) fell much harder, as access to cash is often more difficult for the smaller firms.

Equally telling for me, though, is the idea that... until small company stocks break above large company stocks... it will be difficult to be unequivocal about having made it "half-way through" the recession. When IWC does make a convincing push, I'd be more inclined to look at a variety of indicators, and potentially say, "The bottom is safely in the rear-view mirror."

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Comments

[SeekingTruth:]

You have presented an excellent and easy way to track a trend with established historical precedents, and yet one more valid indicator that I shall monitor closely. Thanks for the heads up.

2008 Dec 22 02:50 PM