About That Uptrend In Small-caps

JC Parets
January 16, 2018

All-time highs across the board in Small-caps these days. Some are in shock. I personally just don't understand why stocks that are in uptrends going up is anything outside of perfectly normal? I would argue that any other result is what we should consider unusual. If the market teaches us one thing is that trends are much more likely to continue than to completely reverse.

In September I put out a post about small-caps breaking out of year long bases. If you recall, at the time, the sentiment around the market was about how high stocks were and how they could not go much further. My argument at that point was the exact opposite. Small-cap stocks had done nothing for an entire year. To suggest the stock market was too stretched was irresponsible, in my opinion. Not only did we want to be long stocks, we wanted to be "very aggressively long" equities.

What my friend Josh Brown tweeted out that day was very true. I spoke from my heart in this post and that is as me as you're ever going to get.

The reason I bring this up is not for a victory lap. The market doesn't reward that sort of behavior. What I want to bring up is the lessons. I think there are two very important lessons from this period. First, that base. Come on? The bigger the base, the higher in space right? This was exhibit A, no question:

The second, and more important lesson is the risk management. And what I don't mean is the risk to the downside, it's the opportunity cost of not being in that I think is the bigger story here.

The stock market doesn't always have epic rallies like this. To not be involved really hurts the overall performance. From a risk vs reward perspective, the line in the sand was obnoxiously very clear. We only wanted to be long if we were above the upper end of this year-long base. And not only long, but very aggressively long. There's a difference. I believe there is a time and place for everything, both a conservative and aggressive approach. It's not about what you want, it's about taking what the market gives you and adjusting accordingly. That's how I see it.

Here is the S&P Small-cap 600 Index:

And here is the Russell Micro-cap Index Fund:

The risk so so well-defined that it was impossible to ignore. If it's not about being right, but about making money, then think about the opportunity cost incurred by not being on the long side of this. And by the way, I realize that many of you, including myself, don't necessarily trade the Russell2000 ETFs or Futures. But that's not the point. This segment of stocks breaking out of year-long bases is evidence of risk appetite, not risk aversion. This was part of the overwhelming evidence of the time to be very aggressively long.

At this point, I still think stocks are going higher. How much higher really depends on your timeframe. But I've been perfectly clear that we've wanted to be very aggressively long stocks, particularly the longer your time horizon. This approach has obviously been incredibly rewarding. But I think the more important point is that we're not seeing anything to the contrary. The data coming in continues to suggest to me that we want to continue to do more buying of weakness and less selling of strength.

Tomorrow, Wednesday January 17th is our first Monthly Conference Call of the Year. Members make sure to register here, and if you're not already a member, start a risk Free trial here to gain access Wednesday night. As always the video of the entire call will be made available immediately afterwards as well as the PDF of the charts to download. I encourage you to join us live if it's possible so you can ask questions throughout the call.

See you then!

JC

 

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