An ETF for U.S. small-cap stocks, iShares S&P Small Cap 600 Index Fund (IJR), set a fresh 52-week high on Friday and is trading at levels last seen right around Lehman Brothers filed for bankruptcy in September 2008.
Small and mid-sized stocks have outpaced large-cap shares measured by the SPDR S&P 500 ETF (SPY) by a wide margin so far in 2010, and since the March bottom last year.
The iShares S&P Small Cap 600 Index Fund was up 8.5% for the year-to-date period through March 12, while the SPDR S&P Mid Cap (MDY) gained 8.2%, and the SPDR S&P 500 ETF added 3.6%.
With small and mid-cap stocks essentially unchanged from where they traded right before the Lehman meltdown, this recovery is “considered an important step for stocks and indexes that have fallen steeply in price,” said ConvergEx Group chief market strategist Nicholas Colas in a March 11 note.
“By recovering the entire amount of lost principal, the stock price is signaling that whatever fundamentals created the meltdown have been resolved,” he wrote. “If the asset can stay above this price, it becomes technical support for future moves higher.”
The outperformance of smaller and lower-quality stocks is typical in the first year of a bull market. So what tends to happen in the second year?
“Historically, small-cap stocks continue to beat large-caps, cyclical sectors outperform defensive ones, and a rising tide once again lifts all boats,” S&P Equity Research Chief Investment Strategist Sam Stovall wrote in a March 5 report. “But while the direction remains the same, the magnitude is reduced.”
Chart watchers will be monitoring the S&P 500 and SPY to see if they can catch up with small-cap indexes.
“To think that the economy and corporate fundamentals have recovered sufficiently to merit the move is another matter,” Colas said. “At least the next data points — an FOMC meeting … and corporate earnings in April — are close at hand.”
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