Small-caps: Are you feeling lost out? - Views on News from Equitymaster

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Small-caps: Are you feeling lost out?

Apr 23, 2009

Strangely, over the past few weeks, stock market behavior and macroeconomic data have not moved in sync with each other. In fact, it would be fair to say that they have actually moved in the opposite directions. While macroeconomic data has shown little or no signs of inspiration, stock markets around the globe, especially in the emerging markets, have behaved as if there is no global recession happening. In India, for instance, since hitting the lows on March 9th, the benchmark indices have seen a sharp run up. And this time, the rally has been led by small-cap stocks as seen from the jump of around 37% in the BSE-Smallcap index. Compared to this, the BSE-Sensex and BSE-Midcap indices have moved up by 32% and 36% respectively during the same period.

While there is no denying the fact that small-cap stocks had been the worst hit in the turmoil that we saw earlier, their sharp movement on the upside has also flummoxed us. And while we were perturbed by the sharp fall in prices of small-caps before the recent rally, we are now anxious seeing their sharp movement.

Here are some statistics that elucidate the rise of the small-caps for the period under consideration –

  • Nearly 8% of the smallcap stocks forming part of the BSE-Smallcap index have recorded gains of more than 80% during this period.

  • Nearly 26% of the stocks forming part of the index have recorded gains between 50% and 80%.

  • Only about 6% of the stocks from the index have recorded declines.

One small-cap stock we had recommended to our subscribers as part of the Hidden Treasure service in the middle of March 2009 had, for instance, run up by almost 100% within a span of just 24 trading days. While the stock has moved down over the past two days, it is still up around 78% since our recommendation…all in a span of just around three weeks.

Signs of danger indeed!

While there's no taking away from the tremendous value that this company can generate for investors in the long run, sharp stock price movements like this is something we do not understand and remain fearful of.

Stock market history suggests that the actions of those who control the vast bulk of investments (and subsequently the mindset) guide the overall belief of where the markets are headed in the future - up or down. You do not know what they are up to. Neither do you know what Mr. Market has under his sleeves. In that case, the only choice we have is to guard ourselves if all hell were to break loose! And the mantra is - Whatever Mr. Market does today, we need not follow suit.

So, are we out of the woods as yet? We don't know. And we would advice you not to trust this rally as well. Things are still bad out there. The idea is to not get blindfolded into believing whatever the markets are doing now is right.

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