Wednesday, July 29, 2009

Midday Briefing: A Look at the Smaller Caps

One of my favorite indexes to follow is the Russell 2000 (IWM, above). Small and midcap stocks act as a kind of sentiment gauge among portfolio managers who are trading equities. If they expect growth in the economy, they will invest in companies and shares that are best poised to participate in that scenario. The smaller, more entrepreneurial and growth oriented stocks will particularly benefit relative to the established large cap names. Conversely, if portfolio managers wish to express defensive views relative to the economy, they'll be more likely to hold the blue chip, stable names and flee the more volatile growth ones.

What we see from the recent performance of IWM is that, even with the consolidation of the past few days, those smaller company shares have held up well. Today's steep drop in China might have been expected to tank the stocks that benefit from the risk trade. As I write, however, IWM has stayed well within its multiday trading range. That suggests to me that money managers may be more afraid of missing the next leg up in stocks than chasing relative price highs; for several days now we've seen early weakness met by solid buying. Staying above today's overnight lows would be bullish for stocks; a move below would represent fresh selling pressure and a continuation of the recent correction.