Small Cap Weakness: Growth-On Opportunity - Cook`s Kitchen

In December and January, I called for the Russell 2000 small-cap index to catch-up to big cap indexes like the Dow and S&P. We finally got that 10% surge from 750 to 830 in the last few weeks of January and into early February.

Then the RUT went sideways for most of Feb, in what many technicians would call a bull flag consolidation. And this while the big caps surged to new multi-year highs, like S&P 1,374.

Then Friday, the RUT broke down further and took out the lows of that flag, puncturing 810 and threatening 800.

Some chartists might draw a trend line, as I have shown here, from the October lows and connecting to successive swing lows. The RUT is in dangerous territory of breaking that trend, just below 800.

I'm not much for hard trend lines and prefer moving averages because they are more fluid and statistically-based measures of price trend.

And I think the RUT will find support "around" its 50-day moving average at 790. When I say around, I am allowing for the fact that it could easily penetrate that trend marker and reverse higher for some other reasons.

What reasons? That we are in a bull market now. And equities are the place to be for trillions in investment capital, especially in an era of QE, to say nothing of a solid and improving domestic economy.

Back to the chart, here's another reason: 770-780 was a strong support area all during the first half of 2011. And it was the first big resistance the market hit when we rallied in October. It will be a level of support to buy this month on any further pullback.

It's About Growth

What about investors who don't look at charts and only want to hear about the economy and earnings. The question becomes: Are small-caps lagging again because they portend less appetite for risk, and therefore are a leading indicator of broad market weakness?

Or is this a potential buying opportunity setting up? I'm looking at the stock market with an eye toward growth that can only be found in small-caps. I would buy strong small-cap stocks and the RUT index on dips below 800 because I think well see 875 before 750 this year.

This market has been in a slow-motion "melt-up" that continues to beat up the shorts. I think the odds are that this can continue. And small caps will shine again.

Kevin Cook is a Senior Stock Strategist with Zacks.com
 
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