Small Caps vs. Big Caps? The Answer Is Clear

All three major indices tumbled on Friday with blame placed on a strong U.S. dollar and lower crude prices. This marked the third straight weekly decline in stocks.

Oil fell 4.7% to $44.84 a barrel, caused in part by an increase in production. Crude is now down 58% since its June highs.

The dollar rose by 0.8% against a basket of currencies. The euro fell to a 12-year low at $1.0482, down 1.3% against the greenback. With expectations high that the Federal Reserve will raise interest rates this year and the European Central Bank just starting a bond-buying stimulus plan, the euro’s decline is expected to continue. The Guggenheim CurrencyShares Euro Trust (NYSEARCA:FXE) is in free-fall, down almost 25% in the past 12 months.

FXE Chart
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Analysts are fearful that the strong dollar will have a powerful negative impact on the earnings of the big multinational companies. This occurs because a strong dollar means that prices for U.S. exports will potentially rise beyond an acceptable level to foreign buyers. Thus, earnings for S&P 500 companies have been cut to an annual growth rate of 1.9%, down from 8% in December.

The focus this week will be on the Fed’s policy meeting on Tuesday and Wednesday. The question that investors want answered is: “When will there be a hike in interest rates?” Some believe it could come as early as June.

At Friday’s close, the Dow Jones Industrial Average fell 146 points to 17,749, the S&P 500 was off 13 points at 2,053, the Nasdaq declined 22 points to 4,872, and the Russell 2000 was down 5 points at 1,232.

The NYSE’s primary market traded 806 million shares with total volume of 3.4 billion. The Nasdaq crossed 1.8 billion shares. On the Big Board, decliners outpaced advancers by 2.3-to-1, and on the Nasdaq, decliners were ahead by 1.5-to-1.

For the week, the Dow fell 0.6%, the S&P 500 was off 0.9% and the Nasdaq fell 1.1%. The Russell 2000 rose 1.2%.

SPY Chart
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Chart Key

SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is weak, closing with increasing volume on down days and decreasing volume on up days.

But with the ETF at its 50-day moving average and between resistance at $209 and support at $198, the jury is still out on the outcome of the struggle between the bulls and bears.

IWM Chart
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The small-cap iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) is stronger than its big-cap brother. Note that volume on up days is higher than volume on down days, an indication that there are more buyers than sellers on balance.

Also, IWM is trading above its support band at $118 to $121 and flashed twin buy signals from my proprietary indicator, the Collins-Bollinger Reversal (CBR), at $115. MACD is arching up and near a buy signal compared to SPY’s MACD, which is in the bear zone and has flatlined there.


Today’s charts, comparing the big caps to small caps, are telling us investors looking for stocks to buy should focus on small caps. This makes sense since large-cap companies do more international business than small-cap companies, which largely focus on the domestic market.

Industries like medical, biotech, technology and utilities are some of the sectors now demanding our attention. This week, I will focus the Trade of the Day on selling global and buying domestic.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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