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Comments on this blog should never be taken as investment advice


Posts on this website are general "tips" and nothing more than that and should never be used to make an investment or trading decision. All information should be carefully cross-checked against official sources for accuracy. Sparty's posts nearly always relate to companies that he either holds, has held or intends to hold.

Main ForumSmall Cap Stock Performance Against The Top 50

  • I have charted the XFL (Top 50 stocks) against the XSO (Small Cap Index) since September 2005, using a base 100 as a basis of comparision (red and blue lines). On the right hand scale I have charted the variance between the 2 indices (Green line). As the green line goes lower it indicates that the Top 50 stocks are relatively underperforming, and conversely, as the line rises the Top 50 stocks relatively outperform.

    Interestingly the variance is between minus 20% to plus 20% and negatively correlates very closely to the direction of the market. Intuitively this seems to make sense. A 40% trading range is something worth keeping in mind.

    Trading in small cap shares is all about liquidity. When the market is bullish investors seek out the relatively cheap stocks that offer the best value. The lack of liquidity assists in the rise of the small cap stocks. But when it comes to a bear market, volatility rises with the small cap stocks getting punished as the sellers look for the buyers. Typical of a bear market is when stocks all correlate with each other. In that scenario, it is all about liquidity and the ability to dump your stock as quickly as the next rumour surfaces. There are quite a few stocks with low P/E ratios looking to be re-discovered in the chase for value, and clearly they are undervalued by over 20%. With the 12% rise in the market over a week, and the dollar back at parity it might be time to have another look. Michael Cornips

    To see the graph visit: http://www.traderscircle.com.au/free/email/privateclient/PCAS_Articles20111011.html

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