VLT Momentum
A Small Cap Strategy Session
Leuthold’s research team has recently flagged a number of items that suggest it may be time to consider small cap stocks. This asset class has been showing signs of life and the decision to overweight small caps is starting to seem relevant – and perhaps nicely profitable - again.
More Good News For Small Caps
Our call for improved relative performance in Small Caps received another boost in November, when VLT Momentum for the S&P SmallCap 600 confirmed the prior month’s “low-risk” BUY signal on the Russell 2000.
A Tough Tape To Read
Over the nearly two years since the stock market’s “momentum” peak in January 2018, the S&P 500 has gained less than 9%, while the Value Line Arithmetic Composite is unchanged. Mid Caps and Small Caps have made no upside progress during this period and most foreign markets are down.
Jury Is Still Out On EM
Emerging Market stocks have been swept up in the last month’s rally in all things cyclical and high beta. Nonetheless, the MSCI Emerging Markets Index is still down marginally from its level coinciding with its April 30th VLT BUY signal.
VLT Complicates The Market Puzzle
At October’s close, a long-term BUY signal was triggered on the Russell 2000. The fact that some market segments are triggering “oversold BUYS” when blue chips are at record highs speaks volumes about the internal disparities that have developed during the last few years. The Russell BUY signal is not inconsistent with our belief that the action since the January 2018 peak remains part of a lengthy cyclical topping process.
The Market Puzzle Gets Even More Complicated
At last night’s close, the Russell 2000 generated a “low-risk” BUY signal on our Very Long Term (VLT) Momentum algorithm, a possibility we’d alluded to in the September and October Green Books.
Small Cap VLT BUY: Not Quite...
Small Caps came tantalizingly close to activating a major VLT BUY signal in September, with the Russell 2000 closing less than a half percent below the trigger level. A new bull signal from this indicator wouldn’t “fit” into our market and economic narrative, but we won’t sweep it under the rug if it occurs.
Commodity Stocks: “Low” But Not Cheap
A general rule of thumb for thematic equity investors is that the dominant leadership sectors and groups in a given bull market normally don’t repeat as leaders in the subsequent bull.
Small Caps: “What If?”
The Russell 2000 is the most important major index on the cusp of a new BUY signal. Our best guess is that Small Caps will still trend lower for now, creating a buying opportunity in the months ahead.
“Too Smooth” Of A Ride?
While investors in Value, Small Caps, and especially foreign stocks might beg to disagree, a key MTI technical measure suggests this decade’s stock-market ride has been almost entirely “pain free.”
Big Is Still Beautiful
The 10-year-old bull grabs most of the headlines, but its younger sibling has begun to command more respect.
Portraits Of An Out-Of-Sync Market
We suggested many years ago that the final top to this historic bull market would be a long and complicated process rather than a clean and singular event.
Adding EM On A Rent-To-Own Basis
The Major Trend Index has remained in neutral territory during the last several weeks of upside action, suggesting there remain significant fundamental and technical shortcomings beneath it all. But this precarious MTI stance didn’t preclude us from acting on a new bullish reading for Emerging Market equities at the end of April.
Adding Some Emerging Markets On A “Rent-to-Own” Basis
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Emerging Market equities have been modest underperformers during the current rally, but they’ve marshaled enough strength to trigger a new low-risk BUY signal on our VLT Momentum algorithm at the end of April.
VLT & Implications For Small Caps
For much of this decade, we had an allocation preference for Large Caps over Small Caps because of the considerable P/E premium commanded by the latter.