How are small cap stocks expected to do?

Question

I own a couple and they seem to be independent on what the Dow does and are going up. Is that a good sign?

Answer 1

long term great. short term maybe not so good. good time to buy them though.

Answer 2

What happens to the Dow often seems an indicator of what other companies will do. Yesterday, there were 1,934 stocks that fell in price on the NYSE, 94 unchanged in price over the day, and 1,400 that rose in price. Of the 30 that make up the DJ Industrials, the net effect was a significant fall, but the whole market didn't. Now most of the NYSE stocks are more substantial than your small caps. The Amex and Nasdaq have a higher proportion of small caps. On this same day, some 616 Amex stocks declined, but 573 increased, a substantially larger share of rising stocks than on the NYSE.

The DJ Industrials dropped 146, but the Wilshire Small Cap Growth dropped almost 40 and the Small Cap Value dropped a little over 58. In percentages, it was a 1.10 percent drop for the DJI and 1.07 and 1.00 percent, respectively. Similar numbers, but a tad bit smaller. The S&P600 Small Cap was down 0.88 percent. The Wilshire Microcap list, the next step down, dropped only 8 one-hundredths of one percent. When I opened the Small Cap list on the WSJ, the first stock in a surprisingly long list, GYMB, was up 9 percent (46 percent for the year) while the whole bunch AVERAGED down 1 percent.

Take heart, the connection is common, but not directly linked. It isn't an automatic thing. If your companies make profits, or are getting closer to making profits, then you have nothing to worry about, in the long run, profitable companies rise in value. Or you can look at lists in places like the Wall Street Journal, and hitch a ride on what is working (but that is called trading, not investing).

Answer 3

No one knows the future, but at present small caps have begun to underperform, a genuine break from their performance of the last four+ years. For example, the Nasdaq 100 (the 100 largest companies in the Nasdaq) is 4.4% above it's 50-week moving average while the entire Nasdaq (3,000 stocks, most of them small) is only 2.6% above its moving average. The Russell 2000 small cap index is below the same moving average while the Russell 1000 is above it. This is indicative of a change in the long-term trend.

One of the factors weighing against small companies is the tightening of credit. Many smaller companies depend on rolling over their debt in the junk bond market and interest rates are rising substantially for poorer credit risks.

Answer 4

The Russell 2000 was massacred in last week's market selloff (July 26-27). I know, because I was trading it. In my limited experience, small-cap stocks boom first in to lead bull markets, but they also tend to suffer first once the market turns bearish.

I would be very, very careful about investing in small-cap stocks at this point in time. I would look long and hard at any candidate's fundamental ratios before putting money into them.