Market Insights

Suddenly small is beautiful in the eyes of investors.

Indexes focused on smaller companies, like the Russell 2000 (IWM) or the Nasdaq Composite ($COMPX), have outperformed larger benchmarks like the S&P 500 ($SPX.X) and Dow Jones Industrial Average ($INDU) since the market bottomed around Christmas. See the RadarScreen® below for more.

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These gains around the holidays mark a dramatic shift from the second half of 2018, when investors clearly favored safe-havens. A few things seem to be going on.

First, there’s often a rotation into new names and out of old names as a new year gets underway. For example, the big “FANG” stocks broke out to new highs at the start of 2017, while General Electric (GE) began its epic selloff.

RadarScreen® showing indexes performance. Notice leadership change in last two weeks.

Second, a lot of the pain in the fourth quarter resulted from giant technology companies that seem to have reached their maximum size for the time being. Those would include Apple (AAPL), Facebook (FB) and Netflix (NFLX). But how about Twilio (TWLO), Okta (OKTA), Etsy (ETSY), Carvana (CVNA), Glu Mobile (GLUU) or Tableau Software (DATA)? Numbers from those smaller growth companies show little sign of them slowing down yet.

Third, 2019 has begun with some mergers. Bristol Myers Squibb (BMY) purchased Celgene (CELG) last week, and today Eli Lilly (LLY) gobbled up Loxo Oncology (LOXO). That’s potentially good news for smaller companies that could get bought.

Fourth, Cboe’s volatility index just had its biggest weekly drop in 11 months. That suggests fear may be leaving the market.

In conclusion, this isn’t a trade recommendation and everyone needs to do their own homework. But price action and the news flow suggest sentiment is shifting in favor of smaller companies.