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Small Cap Stocks Near Multi Year High

Russell 2000 Index

I thought you might like to see what’s happening outside the broad market S&P 500 Index. The chart above shows the Russell 2000 Index with a blue horizontal line drawn on it denoting a resistance level as it nears a multi year high.

Historically, small cap stocks outperform large cap stocks, but with greater volatility. The past three months, the broader market S&P 500 Index has outperformed the smaller cap index on a relative basis, but if the broad market has likely made its highs for the year and is stuck in a trading range.

Bill Cara is reporting “that China’s leadership is set to approve a plan to invest US$300 billion per year for five years in the seven strategic sectors, as follows:

• Alternative-Fuel Cars
• Biotechnology
• Energy-Saving Technology
• Alternative Energy
• High-End Manufacturing of hi-speed trains, wind turbines, solar panels
• Rare-Earth Metals
• Super-Computer Technology

This shift from low-end manufacturing of consumer products being sold by the likes of Walmarts to high-end technology, with the country’s ability to pay for the best in R&D and process engineering is going to push the competition envelope. The economies of Europe and North America will be hard pressed to keep up. Particularly troublesome for the Developed Markets is the deleveraging process that the banks in the leading nations will be going through during this period of massive investment by China.”

This could lead to an extended period of relative outperformance by the small cap entrepreneurial oriented companies globally. Our strategic focus has been to historically overweight small and mid cap companies, and this sort of news makes me certain that our strategy has been and will continue to be the correct path.

As the broader market moved toward its highs for the year near 1225, we reduced equity exposure in client accounts by lowering large cap exposure. When we are ready to increase equity exposure again, it will definitely be to carry on with our strategy in the small and mid cap areas of the market.

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