Friday, November 27, 2009

Chinks in Small Cap Armor

As mentioned previously, there are a few different tools at our disposal when executing relative performance analysis. The first tool I'd like to hone in on is a relative comparison chart. Though this analytical tool can undoubtedly be found in various places on the web, I personally use the one provided on Yahoo! Finance. To access the tool, go to, type in the ticker symbol you want to view in the "get quotes" box, and hit enter. Once it pulls up the information for that security, click on "Interactive" under the Charts section on the left side of the window. Within the chart displayed you can select "compare" and add other securities that you want to use in the comparison.

Within the chart you can compare virtually any time frame, from as short as one day to as long as about 10 years. Consequently, one must necessarily decide the optimal time frame to use for the comparison. Though opinions may vary from trader to trader, choosing the ideal time frame for me comes down to what type of trade you're considering. If you're looking for a day trade candidate, you may the stock's performance over the last day or week. If searching for a swing or position trade, consider the last few weeks to months. Remember there does tend to be a certain degree of "noise" on a day to day basis, so be careful with putting too much emphasis on any one day's performance. The relative strength or weakness of a certain stock or sector becomes more apparent over longer comparison periods.

One of the divergences we've seen in recent weeks has been the relative weakness exhibited by small cap stocks. Consider the following 3 month comparison chart between the IWM and SPY (click image to enlarge).

[Source: Yahoo! Finance]

While the IWM (small cap) was moving in lock step with the SPY (large cap) between Sept. and October 19th, small cap stocks sold off much more aggressively between Oct. 19 and Nov 2nd. Though the SPY has since rallied to new highs, the IWM has failed to even reach its 2009 highs. While large cap stocks were able to stage a strong advance (roughly 7%) in the last 3 months, small cap stocks have struggled to post a measly 2% gain.

Given the recent lackluster performance of the little guys, it's fair to say the bears may be gaining the upper hand in small cap land.