iShares Russell 2000 ETF (IWM)

Usually the small-mid cap space has a pretty good run. It didn’t quite materialize. The drop in early December was pretty big. Mid-small-cap tends to do well in to about early February.

Chart shows a downturn. The seasonal period starts from December 19 until March 7. Since 1979, there has been an average of 5.8% and it has been up 78% of the time. This is a time when small caps tend to perform well.

Very strong seasonality. It has bottomed and is forming a nice little pattern. It just broke above a reverse head and shoulders pattern. Around this time of year it normally goes up until March, outperforming the S&P500.

This is a call on domestic US. 80% of the sales of the Russell 2000 occur in domestic United States. The domestic market in the US is hot and this should do really well.

(Top Pick Dec 23/14, Up 5.41%) He recently sold his position. It can continue to do well even though it is after the end of the seasonal end date. He loves the trade and he has moved on. It recently broke out into an all time high. He will come back to it again next year.

(A Top Pick Dec 3/14. Up 3.93%.) Investors like to take on greater risks at the end of the year and at the beginning of the year. Between mid-December all the way through to the beginning of March, this has gained about 88% of the time for an average gain of about 5%. This is now broken through that $120 level and looks like it is poised to go higher from here.

This is the seasonal time period for the small caps to do well. Also, they have underperformed for most of the year. Although the small caps were going up in 2013, in 2014 they have gone down and have been flat. At the same time, the S&P 500, has been going up. This has now broken out of a consolidation base, right at the beginning of their seasonal period. Underperformance coming into their seasonal period with a good break out at the start of their seasonal period, this is well set up to outperform for the next few months. The other positive thing is that these are US$ based.

Investors tend to take on more risks at the end of the year and at the start of the new year. From December 15, all the way through to March 7, the Russell 2000 tends to gain about 5.65% on average. That outpaces the S&P 500 return by about 3%. December is particularly strong. About 88% of the time it is positive in the month of December, so you definitely want to have your exposure to the small-cap stocks. The largest holding in the small-cap is financials, which runs about 25%. Tax loss selling could be a bit heavier on something like the Russell 2000. It has been hovering around the flat line for most of the year. If you can buy this on weakness over the next few weeks, that would be ideal. He is guessing there will be a breakout on the strength of the market behind it and the positive seasonal tendencies.

This is probably the best way to play the Russell 2000. It is currently in a big long consolidation period. It really needs to break that $120 level. Currently in a consolidation phase and could break out on either side. Don't Buy until it breaks to the upside. If it breaks to the downside, and lasts for a number of days below the support line, that could be a danger sign and he might be tempted to Sell it.

(A Top Pick Jan 3/14. Up 0.20%.) This is a great play at the start of the year. You get a big push in Jan-Feb. This year it capped out right according to queue, at the beginning of March. Period of seasonal strength is from mid-December through to the beginning of March and he made about 9% on this trade.

On average, from December 15 to May 12, small caps tend to do well. (Financial is one of the 3 sectors he suggested in remarks under January Effect.) Investors tend to take on additional risks at the start of the year but, also, the US$ starts to rise during the months of January and February.

The Russell 2000 is a small cap index so if you believe in the potential for small cap stocks, put some money towards it. In most portfolios he would consider this to be a higher risk, which doesn’t mean it’s bad; it just means it’s more aggressive. Higher interest rates will have a more profound effect on smaller caps.

(Top Pick Jan4/13, Up 7.89%) Seasonal strength ends about mid-March.

When markets move, small caps move more. Keep the US market exposure.

Small Caps. The thesis on these is unchanged and he would recommend them now as they offer a risk premium. If you look at historical rates of return, small companies typically outperform large companies by 2%-2.5%. They are more volatile. They have a higher risk but higher return. Doesn’t think we are anywhere near the top.