Small-Cap Stocks Poise to Lead in Market Recovery
August 31, 2008
Sooner or later the market will turn from the current tumultuous bear-market as shown by recent small-cap rally. Since the end of the second quarter the Russel 2000 has gained 6.92 percent in the first two months, while the S&P 500 didn’t go anywhere.
This latest small caps rally is the first tiptoeing of investors back in to the market. When the credit crisis hit, there was a flight to safety. Small-cap stocks were liquidated without regard to fundamentals and valuations, causing them to stumble badly. Because of their size, it does not take much money to drive small caps up when investors buy in, especially during the accumulation phase of market cycle.
Small caps refer to stocks with a relatively small market capitalization. The definition of small cap can vary among brokerages, but generally it is a company with a market capitalization of between $300 million and $2 billion.
Sometimes you have to buy stocks on the way down when companies are undervalued, because you don't want to be caught underinvested and miss the upswing. The best thing to do is build positions in companies that look cheap. Current valuations are as attractive as have been seen in a decade.
In the current turbulent market, we need a stabilization of the financials for the market to really rally. When we get moderation in energy prices and a deceleration in the decline in housing prices, we'll get some stabilization.