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This is the fourth consecutive month with a Small Cap discount greater than 20% for our Ratio of Ratios. The Small Cap discount had narrowed to as little as 8% last March, but since then, the S&P 500 has gained 13% (price only), while the Russell 2000 has lost 8%.

With the first month of Q4-21 earnings in the books, our Up/Down ratio is 1.86. This is just a tick below the long-term “one-month” average. The ultra-soft 2020 lookbacks are a thing of the past; building on 2021 earnings figures will prove to be a much more formidable task.

Our ongoing research into the relative performance of active vs. passive fund styles reveals that market conditions play a significant role in the active/passive return cycle. Accordingly, we identified a set of metrics that describe the market conditions we believe influence which of the two management styles is more likely to outperform. This note updates our research efforts through December 31, 2021.

Read the week's Major Trend

Yesterday, the Russell 2000 closed down 20.9% from its November 8th high, and market bulls have conceded it was “due” for a pullback after a 146% gain off the March-2020 COVID lows.

The Russell’s decline is moderate by the historical high-beta standards of Small Caps. However, this drop—combined with other developments transpiring over the last few years—has produced a shocking result: The Russell 2000 is now unchanged on an inflation-adjusted basis since its “Quantitative-Tightening Top” of August 31, 2018. But what a three-year ride it’s been!

A replay of a Zoom Call with Chief Investment Officer, Doug Ramsey where he shared his thoughts and observations on today's market and what he sees looking ahead. The slides are available through the PDF Download.

Read this week's Major Trend update.

One measure of a bubbly bull market is the degree of speculative fervor embedded in the prices of companies with nebulous, indeterminate, or even nonexistent intrinsic values. Since the bear market low in March 2020, speculative manias have evolved in a menagerie of asset classes including Innovators & Disruptors, SPACs, meme stocks, crypto currencies, and NFTs. Based on the breadth of valuation extremes across numerous and diverse assets, this bull market may rank second to none.

Read this week's Major Trend. 

We wrote in the latest Green Book that a breadth indicator that should be more well-known than it is—the High/Low Logic Index (or HLLI)—had moved to “maximum negative” right at the cycle high in the NASDAQ Composite on November 19th. Specifically, the 10-week moving average of this indicator showed a perilous internal condition in which too many NASDAQ stocks were reaching 52-week New Highs and New Lows simultaneously. That’s the very definition of a “fractured” market, and has preceded some important NASDAQ declines. There have also been a couple of premature warnings, as in the summers of 1996 and 2019.

Read this week's MTI update.

After years of underperformance, Value was finally productive—it was the best factor we track. In general, overall factor performance was good, but worked much better within small- and mid-caps compared to large-caps. Value was especially superior outside of the large-cap universe.

In a reversal of 2020, Small- and Mid-Cap Value dominated their Growth counterparts in 2021. Our Royal Blue Growth and Value segments (mega caps) fought to a YTD draw (+25%).

We know our view on this is controversial, but we like the relative prospects for Small Caps—even though we still believe the broad stock market is currently the most speculative one in U.S. history. 

When we entered the business in 1990, our grandmother mailed us a decades-old clipping from a Minneapolis newspaper featuring a columnist’s cryptic take on a hand-rendered chart. He coyly claimed to have found it in “an old desk”—and it wasn’t until the internet age that we’d learn of its unattributed source.

This reading marks the widest Small Cap discount of the last 18 months. We seem primed, once again, for Small Cap outperformance in 2022 based on our Ratio of Ratios. However, that process may be grinding and long.

Numerologists will be disappointed to learn that longer-term time cycles don’t line up for a prosperous 2022 for stocks. However, the historical “hit rates” aren’t high enough to justify running for cover if you have no other fundamental stock-market worries. 

With the final month of Q3-21 earnings in the books, our Up/Down ratio is 1.52. This “average” figure for Q3 seems a little too “late cycle” given the outsized earnings, sales, and margin rates.

Consider it a sign of the times: Here is the most bullishly slanted version of our “Estimating The Downside” exercise we’ve ever put in print (and likely ever will).