Zak Mir on The (Temporary) Death Of Small Caps?
The fall of the FTSE 100 below 6,300 and new 12 month lows, as well as the loss of the 200 day moving average on the Dow, and the break of the August low on the S&P at 1,904, all suggest that we are looking at a tough October.
The question now is whether a combination of a Eurozone recession, helped along by Russian sanctions, and traditional autumnal weakness for equities, along with Ebola fears, all go to suggest that a longer term decline is on its way?
The answer would appear to be that, at least initially, most in the market would probably prefer go with the negative flow as far as blue chips are concerned. But where does this leave the small caps?
To paraphrase the cliché regarding the U.S. economy and the rest of the world, when the blue chips sneeze, the minnows catch a cold. However, in this Ebola fearing environment it can be said that investors appear to have run for the exit in a big way from those areas where they feel most exposed. Clearly, it is the more speculative area which get the chop first.
Being a fan of the AIM market in particularly over the past couple of years, it is painful to note how we have gone from a state of near euphoria associated with the change in the rules to allow this asset class in ISAs last year, to the doldrums being experienced currently. For AIM, the point is underlined by the way that from a technical perspective it is now actually difficult to imagine the AIM stocks index as being any more bombed out than it is currently. Indeed, after the low of a 10 level RSI – almost unheard of as far as a leading stock or stock index is concerned, there has been a slight improvement.
Nevertheless, given the latest meltdown for the markets it could very well be we are looking at a sub 10 RSI which starts to become a bargain basement situation. Of course, just because a market is extremely oversold does not mean that one should be betting the farm on the recovery argument.
But it could very well be that it is worth gradually seeking out positions which are of value – if you know your company well. This is an idea which perhaps sounds a little easier to describe in theory than in practice, especially considering the way that in recent days it has been hard to ignore the way that many bulletin board hero shares have been declining daily by 5-10%.
It is perhaps also worth looking not just at the AIM “casino”, but at small caps as a whole.
For the FTSE Small Caps index it can be seen that the beginning of the end of the big rally came with a final bull trap retreat from above the 200 day moving average at 4,456 in September. The position now is that this market is deeply oversold with a sub 20 RSI and back at levels not seen since September 2013.
The fear is that there could still be further downside momentum before this index becomes a compelling buy, with the favoured area in this respect being former 4,000 May resistance from last year. Unfortunately, given the presence of an extended top here for this market so far in 2014 the risk is that a weekly close back below 4,000 would suggest we are in for a deeper dive and one should step aside until a sustainable looking rebound looks to be on the cards.
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