The Ides of March is upon us, but it seems like there is no reason to beware. Bears have been head-faked and otherwise bullied about by a market that just won't quit. I continue to expect that the objective I laid out earlier this year of the S&P 500 testing 1200-1230 is likely to be achieved in the next few weeks. It's not that heroic a call, as it represents just another 5-7%.
For anyone who looks at just the big stocks, you are missing the story of the year: Small-caps are on fire! I count 419 stocks in the Russell 2000 that are up more than 20%. I am happy to say that this is where I have been hunting this year. Almost all of the sectors are well represented, with even a Utility making the cut. This frothiness isn't a sell signal, but it does tell us that there are lots of folks throwing in the towel. The median return of this bunch is 31%, and that's on top of the 27% median return for these stocks in 2009.
While the S&P 500 is up about 3.6% on a total-return basis this year, the Russell 2000 has soared 8.4%. The stars have lined up, with the calendar turn inducing risk-taking by hedge funds and the investment of cash by long-only guys. Additionally, the strength of the dollar most likely has contributed to investors favoring the more domestic-oriented smaller companies. I am on the record as calling 2010 a year to "seek Alpha" and certainly it is playing out that way, with investors willing to look at perhaps obscure stories. In 2008, it didn't matter the story, it was going down. In 2009, it didn't matter the story, it was going up. I expect to see this small-cap bias, which kicked in mid-November, to persist all year. Here is how IWM, the ETF for the Russell 2000, has done over the past year, with the relative strength line beneath the price line (click to enlarge):
In case it is hard to see, I based it to the beginning of 2009. The small-caps bottomed relatively in early March and then ran into September. An ugly correction knocked them down to underperforming on a year-to-date basis in early Q4, but they recovered into year-end and are now the best they have been on a relative basis since late 2008. Here is a longer-term perspective:
This chart (click to enlarge) looks like a triple-top on relative performance, with the peak in 2006 and 2008 now being tested. I think that the trend persists. I have been arguing since 2008 that smaller companies tend to have better balance sheets and to be more nimble than their larger peers. The dynamics of a slow-growth economy will continue to favor smaller companies with the added kicker that M&A is heating up.
While I continue to like Small-Caps, the market's run is most likely nearing an end or at least is ready for a big pause. I expect that the end of March to the beginning of April will represent a near-term peak in stocks, though I am not willing to say how bad things get because I don't have a clue (hint: watch the 10yr Treasury). My best guess is that we get a 10% retreat after just missing in the last test. It smells to me like the buying isn't out of conviction but rather out of necessity. It has been painful to fight, and I am very glad not to have been doing so, as I succumbed to that loser's game last summer. My Top 20 Model Portfolio is performing quite well due to being focused on smaller names, but I have begun to make the portfolio a bit more conservative with the recent addition of a utility and taking some profits in extended smaller names. With that said, though, I am having no problem finding names that meet my criteria of offering potential returns in excess of 20% over the next year. Smells like a stock-picker's market!
Disclosure: No stocks mentioned
