Thursday, April 12, 2007

Technical Thursdays: Time Travels

There is much talk regarding the failure of large cap to assume the mantle of leadership from its smaller cap brethren. This is true only if an investor looks at the most recent price performance. However, if an investor takes a step back and sees the market cap categories from a one-year time frame, a different picture emerges.

As the charts on the following page show (see report, link to Blue Marble Research services on left side of page), large and mega cap has outperformed the Smids on a one-year basis. Moreover, the relationship is in the exact order one would assume if the environment has become more uncertain (mega over large over mid over small over micro). However, from a global perspective, things are unchanged. And that’s where things get a bit more complicated.

(Chart comments. See report, link to Blue Marble Research services on left side of page.)

Year To Date: While Large and Mega cap trail, a pattern divergence is evident – Mid over both Small and Micro. This is contrary to the past several years but is less meaningful as Large and Mega trail.

One Year: A different picture emerges when you widen the view. Here, the impact of last spring’s mini correction can be more clearly seen. Mega (OEF) over Large (SPX) over Mid (MDY) over Small (IJR) over Micro (IWC).

From a global perspective, however, things are unchanged.

Year To Date: On a global basis, we see the same year-to-date relationship as in the US, with one twist. Higher growth/higher risk regions such as Asia-Pacific ex Japan (EPP) and Latin American 40 (ILF) top the list while the US (SPX) is at the bottom. The twist is the higher quality Europe 350 (IEV) which is edging out the broad Emerging Markets (EEM) group.

One Year: Unlike the one-year data for the US, however, most of the same year-to-date relationships exist on a one-year basis. It should be noted that Japan trails the pack by a wide margin.

Investment Strategy Implications

On a domestic level, I lean toward the one-year chart as it supports my fundamental views and suggest that we are in a transitional period where risk is not being rewarded as in the past. The counter argument is on a global basis where both the very short and near term trends (year-to-date and one year) are nearly identical. The question then becomes is the US leading or will the year-to-date US performance evolve and bring the one year size performance back in line with the rest of the world?

Beyond the potential breakdown of correlations this earnings season, there is no clear answer just yet. I do believe, however, that change is in the air and caution (higher quality, lower equity exposure) is justified.

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