Small Caps Lag, For Now

Small cap stocks have been shunned in the rally since October in favor of big caps offering stability, liquidity, and yield. I thought this trend might start to revert in January as encouraging economic fundamentals in the US, an easing of concerns about Europe, and money on the sidelines would pour into small cap growth and value.

That hasn't happened yet as both the Dow and the S&P 500 trade nicely above their 200-day moving averages, while the Russell 2000 can barely get near its longer term trend marker. In fact, the mega-caps are so strong that the Dow is not only about 450 points (3.5%) above its 200-day, it also became the beneficiary of the "Golden Cross" on the first trading day of 2012. This is where the 50 and 200 are crossing positive, a very healthy sign indeed.

Here was the snap shot I took this morning of the Russell 2000 (RUT) when I was trying to gauge where I add more longs -- and where I stop myself out if it looks like the pain persists.

I had to exit some longs as the weight of negative European news flow took us down below the December 29 lows of 737. This affected my trading service, Tactical Trader, which was holding a 10% position in TNA, the Russell 2000 3X leveraged ETF.

And it also took me out of half of the Russell 2000 futures contracts I held from an average of 746. Looking at the chart in retrospect, I should have given the sellers more room. 734.50ish was the last swing low. That should have been my maximum pain threshold.

As of 3pm ET, the RUT is back above 750. And I am still a bull targeting a move to 775, just above the October highs, and then 800 if the momentum in the economy and earnings continues.

See you up there!

Kevin Cook is a Senior Stock Strategist with Zacks.com

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