Hope you're enjoying the new October issue! As often happens, I found quite a bit more interesting information on small-company stocks than we were able to fit into this month's Level 3 article, so I thought I'd briefly follow-up here.
A lot of the best stuff was from Bespoke Investment Group, who routinely create some of the best charts in the business.
A Bespoke chart illustrates how awful small-company stocks have been this year. Very obvious trend in terms of size dictating return in 2014, all the way up and down the spectrum. (This was from Monday, so it's probably even more stark after this week's losses.)
Interestingly though, when small-caps and large-caps have diverged in the past, it's usually led to strong results for both the following year. Double digit gains in three of the four past occurrences. (That said, it's a very small sample size and the last time it happened things didn't turn out so well!)
Just in case this week's market action is making anyone nervous, allow me to remind you what we wrote here nine days ago, before the market started falling and the market was still sitting near its all-time highs:
...I wanted to emphasize something else from FBN’s latest bulletin. In it, they noted that the average pullback in the S&P 500 from the September highs to the October lows is 8.5%. I was a little surprised to see that it was that large, but I suppose it makes sense, given that Sept/Oct are often pretty volatile. They also included a chart showing that Sept 16 (today) is typically the high point of the month, which begins the descent to the lows which on average arrive October 9. Keep in mind, these are just averages. This year could be totally different. But it’s interesting that with today’s rally, the S&P 500 is climbing to within spitting distance of its high. Will it drop over the next few weeks as it historically has on average? If stocks decline over the next three weeks, remember that it’s perfectly normal for them to do so. And even more importantly, that decline typically sets off a significant rally through year-end. That, at least, is good news.