Citigroup Bullish on Small and Mid-Caps

Despite the recent run up in stocks, Citigroup strategist Lori Calvasina is still bullish on the U.S. small and mid-cap space.

Ms. Calvasina said in a note to clients:

While we understand the desire to take profits after a sharp run up in the Russell 2000 off of the March 9th lows, we continue to be buyers of small and mid cap stocks at current levels.

She said four of five "signposts" that tend to recover in tandem with small and mid-cap stock prices following market bottoms, are improving.

First, the number of M&A deals and the number of IPOs are growing, which reflects emerging corporate confidence.

Second, retail equity mutual funds flows have now been net positive for eight consecutive weeks, which is something that didn't happen after the November lows.

Third, she noted that credit continues to thaw while the VIX is easing. Both facts combined, she added, typically result in outperformance of small/mid caps versus large caps.

Lastly, she pointed to historical data that compares the performance of the small and mid-cap index with past recessions and recovery trades.

The strategist said:

The Russell 2000 rally off the March 9th lows reached 49% earlier this month was just shy of the 56% average 200-day recovery trade seen in small caps coming off of other recent recession/market crisis bottoms.

Yet, the small caps traded much higher off of the market bottoms in the recessions of the early 1980’s with gains up to 71% and 98%.

Ms. Calvasina said investors wanting to maximize their exposure to small/mid caps, should overweight Tech and Materials, stay market weight on Discretionary plus Producer Durables and Energy, Financials, and Autos/Transports; and underweight defensives, including Health Care, Staples, and Utilities.

Comments

[OldLimey:]

Nothing any bank analyst says or writes has any value. Period.

May 20 01:57 PM