Of Large Caps and Small Caps

This market once again has proven that it’s in full bull mode, with the Dow Jones Industrial Average hitting yet another 52-week high. To say that this has been an impressive run higher since we hit the March lows would be the understatement of the year. A better way to describe this market recovery is just downright amazing. Now, however, we are faced with the task of trying to determine what’s next.

If we look at the chart below of the Dow, we can see that it’s trading firmly above its short-term, 50-day moving average (blue line), as well as its long-term, 200-day moving average (red line).

The fact that the Dow bounced off of its 50-day moving average in early October, and then again in early November, tells me there is a really big appetite for large-cap stocks anytime the market even hints at pulling back. In this kind of market environment, you want to be long on large-cap stocks.

One area of this market that’s been a little less resilient of late is small-cap stocks. As you can see by the chart below of the iShares Russell 2000 (IWM), a fund that represents the small-cap segment of the market, these stocks have yet to break above their 50-day average.

In fact, small caps haven’t yet climbed back to their October high. I think we need to see this segment of the market confirm the large-cap segment’s breakout before you put any money to work in smaller stocks.

I do think there is opportunity here, especially as the market prepares for what I think could be a strong year-end rally. However, when it comes to small caps, they are usually much more volatile than large caps, and that means if you are going to venture into small-cap waters, be sure you protect yourself with strict stop losses.