- Technical-Analytical Market Commentary -

December 9, 2010 (FinancialWire) (By Dr. Joe Duarte) (Entire article at http://www.investrendsyndications.net/12-content/manl/duarte/2010/12/php/09.php) — Shares of the Russell 2000 Ishares ETF (IWM – NYSE) have been outpacing shares of the SPDR S&P 500 ETF (SPY – NYSE) over the last few days.

Is this the January effect? The action on Monday could well be a sign that small stocks are about to make a significant move.

The January effect is the phenomenon that some times happens in the stock market, where small stocks outperform their larger brethren sometime in the November to January time frame. Initially, it used to happen in January. But as more investors started looking for it, it began earlier on many occasions.

And although it's part of the Wall Street lore, just as is the vaunted Summer Rally, the January effect can be fleeting, or can actually skip the small stocks altogether.

But 2010 is getting that look of a potential barnburner for the smaller stocks in the Russell 2000 Index (RUT).

The Russell 2000 is the traditional benchmark for small stocks, often those companies with less than $1-$2 billion market capitalization, although that definition often changes. The important thing to remember is that small stocks differ significantly from larger stocks, such as those in the S&P 500, although not all small companies meet all of the criteria.

Most important is the size of the company, and its client base. Usually, small stocks don't have much of an international presence, which is why, generally, they tend to rally when the dollar is strong or stable. This isn't as reliable a criterion as it used to be, but it makes some sense, especially when the larger stocks, such as the ones in the S&P 500 aren't performing as well.

For example, The S&P 500 bottomed on or about June 29th. Since then the index is up some 15%. The Russell 2000 bottomed in late August. Since then RUT is up some 21%. Here's the kicker, though. The dollar bottomed in early November. Since then the small stocks are up nearly 8% while the S&P 500 is up a mere 2.5%.

That suggests that a stable dollar is bullish for small stocks. And since Europe is having more troubles of late, the dollar could well continue its rise against the Euro, which is likely to make small stocks act better, especially during the season when they tend to do better on their own merits.

Here's something else to remember. Small stocks are growth stocks. They trade at higher multiples, and are easier to move higher because they have smaller floats than blue chips or large cap stocks. That means that smaller amounts of money could move the prices of individual stocks more dramatically.

From this vantage point, it looks as if small stocks are in the midst of an important advance, which could last another few weeks, if seasonal tendencies hold up.

Small stocks could be in their sweet spot. Seasonal tendencies and the relative stability of the dollar may be instrumental to this changing dynamic.

Most interesting is the fact that as Washington cuts more deals and perhaps some deficit cutting gets done, the dollar is likely to show some more improvement, although that isn't guaranteed.

Still, it's hard to argue with the charts, at least for now.

Source: http://www.investrendsyndications.net/12-content/manl/duarte/2010/12/php/09.php

(Go to http://www.financialwire.net/?s=drtjby to see more commentaries by Dr. Joe Duarte, and go to http://www.financialwire.net/2010/05/01/about-duarte/ for more about Dr. Duarte.)

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