Chart Spotlight

Another technical data point that lends toward higher stock prices is the leadership small cap/growth stocks have been showing. Below left is the S&P 500 and we can see that a low was made at about 1200 on July 15^th and it now sits at 1257, about a 5% gain. The Russell 2000 Small Cap Index, below right, is up nearly 10% during the same period. Our experience is that when small caps are showing this type of leadership, the market is higher in the short-to-intermediate term. Combine this dynamic with the factors outlined above and again it appears this is the time to take advantage of what seems to be a cooperative stock market. An overweighting in growth and small cap stocks may be the allocation that could work best in the coming weeks/months. As we have mentioned before no one indicator or even a series of indicators always work. If we fail miserably in the coming days and the market takes out the lows of two weeks ago with a miserable tape, we reserve the right to change our minds (see disclaimer below). Remember in our work it is okay to be wrong, it is not okay to stay wrong.

Did You Know…

When the S&P 500 dropped to 1215 last Tuesday (7/15/08), the stock index was 22.4% below its 10/09/07 all-time closing high of 1565. The decline marks the 10th bear market for the index in the last 51 years (i.e., since the summer of 1957). The average loss for all 10 bears has been 31%. A bear market is defined as a stock market decline of 20% or more. After hitting a bear market low on 10/09/02, the S&P 500 rose +3.5% on the next trading day. After hitting a low of 1215 last Tuesday, the S&P 500 gained +2.5% the next day. Only 1% of all trading days in the last 50 years have produced 1-day gains of at least +2.5% (source: BTN Research).