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"Rough Summer" For Small Caps Set To Continue

Small Cap stocks are in the middle of their worst summer doldrums since 2011 - and in fact for many individual stocks, worst summer since the collapse in 2008/9. While talking heads proclaim these smaller (supposedly more domestically-oriented) stocks a must-own, they have underperformed significantly as the credit cycle turns (thanks to their higher sensitivity to funding costs, among other things). Judging by this week's farce, the supposedly high-beta small caps are being BTFD'd aggressively either and perhaps that is because, since 1926, on average, September and October are the only months in which small-capitalization stocks have posted losses.

 

Weak Summer...

 

And Weak Bounce...

 

And as Bloomberg reports, Fall may be no better...

Shares of smaller U.S. companies are headed for their biggest monthly decline in almost four years, and history suggests they may not recover their losses any time soon.

 

 

 

September and October are the only months in which small-capitalization stocks have posted losses on average since 1926, as the chart illustrates. The data was compiled by the University of Chicago’s Center for Research in Security Prices.

 

...

 

“It has been a rough summer for small caps,” Steven G. DeSanctis, an equity strategist for Bank of America Corp.’s Merrill Lynch unit, wrote two days ago in a report that cited the chart’s data.

 

The Russell 2000 Index, whose companies have a $714 million median market value, has fallen 10 percent for August. A loss of that size would be the biggest monthly decline since September 2011. Rising stock volatility and weakness in high-yield bonds indicate a rebound may not come soon, wrote DeSanctis, who is based in New York.

*  *  *

Credit continues to flash red...

 

A pattern we have seen before...

 

Trade Accordingly...