How to Lie about Small-cap Weakness

JC Parets
January 21, 2024

You notice how the world's worst investors keep pointing to small-cap underperformance as a justification for missing this entire bull market?

Even with the S&P500, Nasdaq100 and Dow Jones Industrial Avg all hitting new all-time highs this week, they'll tell you it doesn't count because the Russell2000 can't keep up.

These groups of individuals fall into 2 camps: They are either really really bad at this counting thing. OR, and more commonly seen, is that they're just lying to you.

This note is for the latter group.

The way I see it, if you're going to be a good liar, there are some simple rules to follow.

First of all, if your goal is to convince people that Small-cap underperformance is a reason to sit out during a historic bull market, you have to make sure to ignore the fact that the most important Small-cap sectors are all outperforming the majority of Large-cap stocks.

As you can see here, Small-cap Industrials are up 44%. Small-cap Discretionary is up 39%. Small-cap Technology is up 27%.

This is all while the Dow is up only 26%. And the S&P500 is up 35%.

Keep in mind, the Russell2000 (up ONLY 20%) is loaded with little banks and tiny biotech stocks, representing almost a quarter of the entire index.

Most sectors, and specifically the most important sectors, are all outperforming.

So if you're going to be a good liar, you need to make sure to keep all those facts away from your prey.

Also, be sure to also keep history out of the conversation. Otherwise, people will find out you're lying.

The truth is that Small-cap stocks underperform large-caps regularly during bull markets.

So make sure you don't tell them this easy to find fact. Here's an example from the 90s:

Also, to be a good liar about small-cap underperforming, you need to convince people that breadth is weak and deteriorating.

So showing them that more small-caps are making new highs than at any other point in years, will quickly catch you in your lie.

Make sure to never show them this chart:

Breadth expansion, particularly in Small-caps, is not a good way to lie to people about a Small-cap bear market.

The most amount of new 3-month highs, and the most amount of new 52-week highs that we've seen in years is NOT a characteristic of bear markets.

It's actually quite the opposite. We regularly see these sorts of events early on in bull market cycles.

So to be the best liar you can be, you have to make sure to not bring up market breadth in your fairytales.

Let's recap, because to make a good liar you need to be precise:

Rule #1 - Focus on the performance of the Russell2000 Index, and do NOT bring up any of the actual small-cap stocks themselves.

Rule #2 - Do NOT tell them that the Russell2000 is up over 20% this cycle, because then they'll think it's a bull market.

Rule #3 - Do NOT mention that that the most important small-cap sectors are all outperforming Large-cap stocks, including Small-cap Industrials, Small-cap Consumer Discretionary and Small-cap Technology.

Rule #4 - Do NOT remind people that Small-cap indexes regularly underperform Large-cap indexes during bull markets because Small-cap Indexes, by definition, always kick out all their best players.

Rule #5 - Justifying sitting out during a historic bull market is easier when you can convince people that breadth is weakening. So definitely do NOT show them the most amount of new 3-month highs and most amount of 52-week highs in small-caps that we've seen in years.

Rule #6 - This is more of a guideline than a rule. But it definitely helps justifying poor choices when you tell people to adjust their charts for inflation. M2 is also a good choice. Do NOT let people trust price as the truth. You must dilute the truth with some arbitrary measure of inflation or money supply.

Being a good liar is hard.

Do NOT let facts get in the way of your good story.

Stay true to who you are.

And most importantly, definitely do NOT admit that you were wrong all along. You have to keep the lie going. Don't give up.

Keep the good fight going.

BUT, I will say this. If you are going to throw in the towel and stop this blatant lie, I would encourage you to email me first. I will happily show you the data so you can actually share the truth with your audience.

I'm here to help either way.

JC

 

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